Forward pipeline suggests only way is up for Petrofac

At the start of the trading year, it looked as if FTSE 250 oilfield services company Petrofac (LON:PFC) was on the ropes. In February, in an ever volatile oil price environment, Petrofac found itself staring at a possible £400m investor payout in legal action linked to an alleged bribery scandal.

On 6 February 2019, David Lufkin, the company’s former global head of sales pleaded guilty to offering corrupt payments in an attempt to bag contracts in Saudi Arabia worth $3.5bn (£2.7bn) and contracts in Iraq worth $730m (£566m). 

Furthermore, the company has been under a UK Serious Fraud Office (SFO) investigation over alleged bribery, corruption and money laundering issues related to oil contractor and consultancy Unaoil. A matter of days after Lufkin entered a guilty plea, litigation funder Innsworth and law firm Keystone said that they are analysing “potential claims” on behalf of shareholders to launch action against Petrofac. 

In the wake of the development, the company’s share price dropped to as low as 381.50p (12 February) from summer highs of 663.40p last year (2 October); a near 43% drop in value. A downgrade from JPMorgan and 'negative' outlook issuance by rating agency Moody’s followed. 

However, Petrofac’s saving grace has been that no charges have been brought against the company, current officers, employees or board members so far. It has also posted passable full-year financials for the year to 31 December 2018, with revenue at $5.82bn down from $6.39bn, and net profit at $64m.

Petrofac’s ‘business performance’ metric for 2018 eyed by analysts came in at $353m representing a 2% decline from the $361m tally in the preceding year, but, smaller exceptional impacts meant that Petrofac could report the positive net profit versus the $29m loss for 2017.

Whether further charges are brought against former or serving employees, or the Company, remains a question for the SFO and the prospect of shareholder action looms, but from the market’s perspective, its the company’s new order intake that matters most for the moment. 

Since February, Petrofac has consistently chipped away at bagging further orders. Just last month, it revealed the signing of two contract extensions for long-standing clients in the North Sea valued at $32m, including a contract extension from oil giant Total's UK exploration and production unit. 

At the time of filing its financials in February, Petrofac had highlighted around $5bn of new order intake and a $9.6bn order backlog (at 31 December 2018), and by that argument the backlog, coupled with the award of material contracts over the remainder of 2019 could lift its estimates and confidence. 

As the oil price remains volatile, albeit oscillating in the $60 to $75 per barrel bracket using Brent as a benchmark, for what it is worth, the second half of the year could be crucial for Petrofac. More holistically speaking, as an oil and gas market analyst, I remain optimistic on the short to medium-term trajectory of the oilfield service sector as a whole, as I view LNG projects and related contracts as a key growth area with over $150bn of capex waiting to be sanctioned by project sponsors, based on aggregate of projections made by market forecasters on final investment decisions. 

Petrofac is showing signs of tapping into the market sentiment, leading RBC Capital Markets to up its price target to 640p. Of course, the company’s SFO investigation overhang continues. It says it is continuing to “engage with the SFO."

“We reiterate that no charges have been brought against Petrofac or any other officers or employees. No current board member of Petrofac is alleged to have been involved in relation to the admission of offences by a former employee on 6 February 2019. In the absence of any charge or credible evidence, Petrofac intends as a matter of policy to stand by its employees.”

What’s more, Petrofac’s net debt was eliminated in the last financial year to a net cash position of $90m. On 1 May, the company put its final dividend at 25.30 US cents per share, exchanging at the time at 19.34p. 

Ayman Asfari, Group Chief Executive of Petrofac, has noted: “Healthy new order intake reflects our strong competitive position. Our results have also benefitted from the sale of non-core assets as we transition back to a capital light business. Together, these have returned Petrofac to a net cash position well ahead of schedule. Looking forward, we are well-positioned for 2019 with good revenue visibility.”

Conclusion: It is now a straight cut tussle between CEO’s optimism, order intake and doubts emerging from the SFO investigation. Even if the investigation's overhang is maintained, Petrofac has kept in touch with a ~10% rise in the FTSE 350 Oil & Gas Index. Despite two major share price slumps, in 2017 and the more recent decline in February, Petrofac has managed the fallout much better than expected, and anticipates a resolution with no findings of wrongdoing.

If that turns out to be the case, a medium-term uptick in the company’s share price to 630-650p bracket cannot be ruled out. However, a more cautious price target bracket for this dividend-paying FTSE 250 company should be 590-610p 12-months out, barring any negative legal developments or a dramatic oil price slump.