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Why I think the Petrofac (PFC) share price could double

Alan Oscroft
Two hands holding champagne glasses toasting each other with Paris in the background

Oilfield services firm Petrofac (LSE: PFC) has had a torrid time, with its share price down 50% over the past five years. It did perk up a little in early 2018, but since August that year, it’s fallen right back down again.

In better times, investors in a ‘picks and shovels’ company like Petrofac should do well whoever nails the oil discoveries, but the downturn following the oil price slump hit the firm hard as operators across the board reined in their expenditure.

Renewed price weakness with oil only around $60 a barrel isn’t helping, but the big drag on the share price comes from a Serious Fraud Office (SFO) probe into bribery allegations over some Middle East contracts, which has been going since 2017.

Low valuation

Even without that, forecasts are still tough for a couple of years. But the share price crash has dropped the forward P/E down as low as 6.5 now, and that’s with a dividend yield of 7.3% that would still be twice covered by even the predicted 20% drop in earnings for 2019.

Business looks to be picking up, with Petrofac announcing on Wednesday that it has secured “awards and contract extensions with a combined value of more than $120m, delivering against the group’s strategy to position Engineering & Production Services for growth by diversifying into new markets and geographies.”

The new work is geographically diversified, with one major contract in Malaysia for Asean Bintulu Fertiliser, a subsidiary of Petronas. It’s all about building a boiler plant in central Sarawak, and spreads out from oil field work.

There’s also a “new three-year engineering, procurement, construction and commissioning framework agreement with a North Sea operator,” in which the company’s Aberdeen office will play a major part.

Acquisition

Petrofac has also just acquired W&W Energy Services, as a further part of the same strategy. Petrofac says “W&W offers maintenance, repair & overhaul and pipeline tie-in services in the Permian Basin, the world’s largest producing basin,” and that aligns with its plan to diversify.

I can’t help feeling it’s a wise strategy too, as it should hopefully provide a bit more defence against future oil weakness — even if there’s probably nothing that would isolate an oil services firm from another $30 oil shock.

But, another oil catastrophe aside, can the Petrofac share price really double? Well, unlike many in the oil business, Petrofac isn’t carrying any net debt. In fact, at the interim stage, Petrofac had net cash of $69m on its books, putting it in a healthy liquidity position — and well poised, perhaps, to make more acquisitions?

Big recovery?

With what I see as solid recovery prospects, no debt, and those big dividends, I could easily see Petrofac’s shares commanding a P/E of 12 or 13, or perhaps more, and looking like a screaming buy… if it wasn’t for that SFO investigation.

I expect a positive outcome would cause a share price spike. And, depending on what the SFO actually says, I really could see the shares doubling in the medium term. But who knows what a bad result could do? It could potentially be catastrophic.

Do you feel lucky?

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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 2019