2020 has been a terrible year for oil and gas companies worldwide. Petrofac (LSE: PFC) was one of the companies that suffered badly from the Covid-19 pandemic and the ‘oil crisis’ between March and May. Since the beginning of the year, Petrofac shares have lost more than 60% of their value, making them among the worst FTSE 250 performers this year.
However, as the rollout of Covid-19 vaccines in the UK and around the world has brightened the economic outlook, I reckon oil and gas related-companies could be on the rise next year. Yes, Petrofac faces mounting pressure on new orders due to the ongoing pandemic. But the oil and gas facilities services provider has a long history and a robust portfolio of infrastructure energy projects. As such, I think Petrofac shares could be worth buying at current levels.
The oil industry
It’s no wonder that Petrofac’s share price plummeted earlier this year. Oil and gas giants like Royal Dutch Shell and BP have faced major challenges amid the pandemic. According to the World Bank, energy consumption remains well below pre-pandemic levels. And demand for energy products will only fully recover in 2023.
Much like other oil companies, Petrofac was severely affected by the lockdowns around the world. The lockdowns forced it to shut down most of its operations. As a result, it recently warned that profitability will be “materially lower” when it reports its full-year results in February. And it expects final revenues of £4bn for 2020 compared to £5.5bn in 2019.
But Petrofac is not an oil producer. Instead, it builds, designs, and maintains energy infrastructure in several locations across the globe. For a large portion of its revenues, it relies on oil companies. In my view, this is a reason for optimism as the demand for global oil is expected to recover by 5.7 million barrels per day in 2021 (just 3 million barrels below pre-covid levels).
Petrofac share price: what’s ahead in 2021?
Since the pandemic crisis started, Petrofac has taken major steps to reduce costs and expand its future operations. After cutting costs by $125m in May, it announced in December that it plans to cut a further $250m in 2021. As such, it laid off nearly 20% of its staff, reduced salaries, and cancelled its dividend payout.
At the same time, Petrofac has won a series of contracts to ensure operational performance is maximised next year. This includes a $1.65bn contract for an Abu Dhabi megaproject and a two-year contract from NEO Energy. Then there’s a contract for a green hydrogen project, and the largest crude distillation unit operation in Kuwait. Additionally, it has a pipeline of around $46bn of potential contracts for 2021.
All things considered, I think Petrofac’s share price has a positive outlook for the next year. From its current price, I see plenty of reasons why it could at some point be trading again at pre-Covid-19 levels. This would mean an increase of nearly 300%. And if the oil industry recovers next year, it’s very likely that Petrofac shares will attract more attention once the company resumes paying dividends.
The post Here’s why I think Petrofac shares could be worth buying in 2021 appeared first on The Motley Fool UK.
Tom Chen 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 2020