Until the end of 2013, everything seemed to be going well for this oil-services company. Its bread-and-butter business of building and maintaining oil platforms was doing nicely and winning orders.
The Integrated Energy Services unit, where it partnered up with oil companies to operate oil platforms in return for a share of the spoils, was going to keep profits racing ahead. Its shares were well liked by investors.
How fast things can change. Last year, it issued three profit warnings, hammering the share price which has fallen from a high of nearly £15 back in May to just over £7 now.
Sure, the falling price of oil has not helped sentiment towards oil companies – but it seems that a large chunk of Petrofac’s (LSE: PFC) woes has been self-inflicted.
Just over a month ago, Petrofac told investors that it expected its net profits for 2015 to be around $500m. A year ago it said it was on track to make nearly $900m.
So what’s gone wrong? A falling oil price means that oilfields tend to make less money. But there have also been teething troubles in getting projects to work properly in places such as Mexico, Romania and the North Sea. A big oil platform project in the Shetlands has also hit problems and will not make any money for Petrofac this year.
Can Petrofac recover? These hiccups have unsettled many investors – but if the company can sort itself out, then at the current price the shares might be worth looking at. It’s often said profit warnings come in threes.
If this is true – and I’ll warn you right now it isn’t always – then perhaps better days are ahead.
Petrofac has to get its house in order but there are grounds for optimism. It continues to win new orders and in fact has a record order book of just over $21bn (around 3.5 times 2013 revenues). Of course, the low oil price might make oil companies think twice before spending on new rigs and pipelines. They may even cancel contracts. But so far this has not happened.
It’s also worth noting that only around 20% of profits are coming from jointly operating oil platforms. If building and maintenance orders turn into the expected revenues and the oil price rebounds, then Petrofac shares – at just over seven times 2015 forecast earnings per share (about 95.8p at the current exchange rate) – could be cheap.
Last year’s dividend per share was just over $0.65 (42.9p at current exchange rates). If the company has the confidence to maintain this when it announces its 2014 results in February, then the 6% yield could attract fresh buyers.
Verdict: risky buy at 711p