FTSE 350 Oil & Gas Services: Signs of solace beneath the scandal?

The market judged London’s largest oil services companies in 2017, and the verdict was a definitive thumbs down. At issue was not only the margin pressure or write-downs seen in recent years, but the whiff of scandal.

First to fall was Petrofac (PFC), which in May confirmed it had been caught up in the Serious Fraud Office’s (SFO) sprawling probe into Monaco-based industry consultancy Unaoil. Characteristically, the fraud agency gave little away, other than to say it was investigating Petrofac “for suspected bribery, corruption and money laundering”. But the mere association with Unaoil – whose officers the SFO has accused of making corrupt payments “to secure the award of contracts in Iraq” – will have permanently tarnished the group’s reputation among many potential clients.

Compounding the woe, chief operating officer Marwan Chedid was suspended, and the criminal agency questioned the group’s co-operation. Chief executive Ayman Asfari, who with Mr Chedid was questioned by the SFO while under arrest, has been blocked by the board from “engaging with or liaising with agents and consultants”. At the start of 2018, there has been little sign of progress, and no mention of the investigation in a December trading update.

The dire news and ensuing share price slump at least provided Petrofac with sufficient cover to ‘re-set’ – rather than cancel – its lofty dividend payment. That December trading update also reminded the faithful that, beneath the dreadful headlines, operational activity continues in earnest. Mr Asfari even pointed to “a recovery in new order intake in 2017” and the $5.2bn (£3.7bn) in new contract awards in the year to date, “in both existing and new markets”.

Mindful of the need to counter market fears (or pessimism) that Petrofac may have been forced to compromise on margins to secure deals, Mr Asfari said bidding discipline has not been sacrificed. Amid the assurances, and from such a low base, it is possible that sentiment for the shares will return in 2018 alongside reportedly buoyant tendering activity, although as long as the SFO probe hangs in the air, we would caution potential investors to watch this one from the sidelines.

Unfortunately, Petrofac was not the only company to become ensnared in the Unaoil scandal. Amec Foster Wheeler, which was thrown a life raft in the form of an all-share takeover offer by Wood Group (WG.), is also being investigated for possible bribery, corruption and related offences. Doubly unfortunately, this has also attracted the strong-armed regulatory oversight of the US Department of Justice, which has made voluntary requests for information regarding Amec’s “past use of third-party agents”.

We also think Wood’s trading activity could remain lumpy in 2018. At issue isn’t the quality or profile of the contracts the oil services outfit has been involved in – upstream greenfield projects include Statoil’s Peregrino field offshore Brazil, Noble Energy’s monster Leviathan gas development in the Mediterranean, and BP’s Mad Dog 2 – it is the scarcity of such deep-water and offshore projects. US onshore engineering work offers one potential source of hope, given the mooted growth in shale drilling, although recent trading activity has disappointed.

Then again, a year is a long time in oil markets, and if oil prices continue to hold above $60 a barrel, optimism could return in full force. For this to happen, investors will probably want to see an uptick in final investment decisions for major offshore projects.