The Petrofac (LSE: PFC) share price has been volatile over the past year, but the ups and downs have eased off in recent months. Despite the rocky ride, we’re looking at just a 1% overall increase in the past 12 months.
Over that time, Petrofac shares have been as low as 92p and as high as 161p. With a loss expected this year, it’s hard to put a valuation on the stock. But I’m starting to think we could be looking at an attractive recovery candidate here.
I like business-to-business companies that provide services, materials, and infrastructure to cash-generative industries. Petrofac, providing infrastructure to the oil and gas sector, fits that bill nicely.
It does, of course, rely heavily on the state of the oil business. And if we needed any reminder of where the energy sector is heading in the long term, we’ve just seen the conclusion of the COP26 climate conference.
But Petrofac also provides renewable energy infrastructure, and I can only see demand growing strongly there over the long term. I think a company like Petrofac, which already has extensive contracts and contacts in the energy sector, should have a significant competitive advantage.
So I see Petrofac as a good way to hopefully invest for the renewable future, while still making gains in the years in which oil and gas will still be essentials.
The company suffered during the Covid period, as demand for its services dropped. And that had an adverse effect on the first half of the current year. Still, reporting interim results in August, chief executive Sami Iskander said: “Moving into the second half of 2022, a significant increase in bidding activity has put us firmly on the path to grow backlog over the full year“.
We’re still looking at three years of losses in a row, though. But analysts are forecasting a return to profit in 2023, putting the shares on a forward price-to-earnings (P/E) multiple of around 20. That might seem a bit high, especially during a recession. But further forecasts see it falling below seven by 2024. And analysts expect to see dividends back on the cards by 2024, with a 5% dividend yield.
Now, these are just forecasts. And forecasts are uncertain at the best of times. Heading into a recession, they’re going to be riskier. And two years ahead is too far to look, really. But the improving outlook does at least suggest to me that investor sentiment is turning positive towards Petrofac.
I see debt as another major concern. Net debt stood at $341m at the interim stage, which surely increases the risk in the current economic climate. Liquidity looked fine at the time, but I don’t think I’d buy without seeing some signs of debt coming down.
The Petrofac share price has been gaining since October, so is that likely to continue? A lot will surely depend on how the second half turns out. To get an idea of that, we’ll need to wait for December’s scheduled trading update.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022