ii view: Petrofac positioned for multi-year upcycle

Shares for this oilfield services company are up year-to-date but have underperformed the oil companies it works for. Buy, sell, or hold? 

First-half trading update to 30 June

• Group order backlog expected to fall to $3.8 billion from $4 billion in December
• Net debt of $345 million, up from $144 million in December

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) today detailed trading in line with management expectations as it moves to capitalise on an expected multi-year upcycle supported by higher energy prices. 

Petrofac’s client base includes many of the world's oil majors. Its Engineering & Construction (E&C) division is expected to secure strong order intake over the second half, with a healthy 18-month bidding pipeline underpinned by opportunities in the UAE and offshore wind.

Petrofac shares rose by more than 3% in UK trading having come into this latest news up 7% over the last year. Oil giants Shell (LSE:SHEL) and Chevron Corp (NYSE:CVX) are each up by more than 40%, as energy prices surged following both a recovery from the pandemic and the West’s attempt to avoid using Russian oil following its invasion of Ukraine. 

• The investments that will keep growing – even during a recession
• The only three FTSE 100 shares not expected to pay a dividend this year
• 60 reasons to sell your UK shares

Petrofac designs, builds, operates, maintains, and manages oil and gas facilities in countries such as Saudi Arabia. Its order backlog over its last financial year to the end of December fell by a fifth as it both delivered on existing projects and oil company customers continued to maintain capital discipline, delaying new capital expenditure and contract awards in response to the global pandemic.

First half revenues to the end of June for its E&C division are expected to be around $0.6 billion, down year on year, with the performance for its Asset Solutions business summarised as ‘robust.’ 

Group net debt of $345 million is expected to fall during the second half of the year. Interim results are scheduled for 11 August. 

ii view:

Petrofac’s core markets are in the Middle East and North Africa and the UK North Sea. Founded almost 40 years ago, today it employs over 8,000 people across more than 30 offices worldwide. The chief executive is pursuing a strategy to position for growth, offer best-in-class delivery and enhance returns. Its six core values now include safety, an ethical approach and innovation. 

For investors, caution on the part of its oil company customers, given the freeze in activity which the pandemic caused, continues to overhang. Revenue in its last full financial year fell by a quarter, with the company generating consecutive annual losses. A previously attractive dividend payment remains halted, net debt is up given the payment of a previous SFO bribery fine, while customer investment is historically volatile and uncertain.

On the upside, the gain in the oil price during 2022, helping to boost oil company profits, should see customer confidence in executing capital expenditure grow. Uncertainty regarding a former bribery investigation is now past and the targeting of new energy orders is positive. On balance, and while the shares remain higher risk, management initiatives and a more favourable oil price arguably offer scope for upside opportunity over the longer term. 

Positives: 

• Refreshed strategy under CEO 
• Expanding its clean energy business

Negatives:

• Suspended dividend payment
• Customer investment is historically volatile and uncertain

The average rating of stock market analysts:

Buy