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Petrofac plunges on SFO development

A former executive of the oil and gas group has pleaded guilty to 11 counts of bribery
February 12, 2019

Since May 2017, the market has been aware of the Serious Fraud Office’s (SFO) probe into Petrofac (PFC), its “officers, employees and agents” for suspected bribery, corruption and money laundering. Yet few investors in the oil and gas services company will have been prepared for this week’s developments.

IC TIP: Sell at 378p

The fraud agency announced that Petrofac’s former global head of sales, David Lufkin, had pleaded guilty to 11 counts of bribery. Between 2012 and 2015, Mr Lufkin made a total of $51.2m-worth (£39.6m) of payments to unnamed parties, thereby helping Petrofac secure contracts in Iraq and Saudi Arabia worth more than $4.3bn.

The SFO added that corrupt offers were made to an agent “for the award of other contracts at the time”, but that no payments were made when Petrofac was unsuccessful in its bids. Mr Lufkin will be sentenced at a later date, although the SFO continues to investigate Petrofac’s use of agents “in multiple jurisdictions, including Iraq and Saudi Arabia”.

Responding to the development, Petrofac highlighted the absence of charges “against any group company or any other officers or employees”, and confirmed that no current board member is alleged to have been involved in the bribery. Chairman René Médori added that “in the absence of any charge or credible evidence, Petrofac intends as a matter of policy to stand by its employees”.

The market was less loyal, wiping 32 per cent off the share price, equivalent to more than £600m in market capitalisation.

Implicit within that sell-off, and of critical importance for any shareholders still betting on a recovery in the battered stock, are several questions.

The first is whether the extent of the alleged corruption opens a new front in the reputational issues that accompany an open fraud investigation. While Petrofac has continued to win business since it was dragged into the SFO’s probe of Monaco-based oil consultancy Unaoil, clients and partners have been unaware of the historic bribes allegedly made on behalf of the company. Now that the market is aware that a senior Petrofac executive did indeed offer corrupt payments over several years to obtain contracts, how will this now affect new contract awards, particularly in the Middle East?

The second question is what financial controls did Petrofac have in place that allowed a senior executive to allegedly funnel more than $50m to third parties over almost four years?

Presumably, shareholders will also want to know how these financial controls have changed in recent years. The company did not respond to our request for detail on this matter, the current status of its financial controls, how contract tender activity is budgeted, or the threshold above which a group director would need to sign off payments.