The oil industry is in a state of flux. The realities of peak oil are gradually hitting home. Most of the easy-to-obtain oil has already been extracted. Oil reserves are gradually decreasing, and the remaining oil is increasingly difficult to extract.
Yet oil remains the main way that cars are powered. Alternative technologies such as electric, hybrid and fuel-cell cars are being developed, but most people still buy petrol or diesel cars.
A future of steady growth
So where does that leave companies such as oil services business Petrofac (LSE: PFC)? On the one hand, as oil production decreases, many oil companies are reducing capital expenditure, which would mean less spend on oil services.
But, on the other hand, the fact that most of the current oil reserves are in hard to extract places such as the Arctic and the Gulf of Mexico may mean that there is actually increasing demand for the engineering expertise of companies such as Petrofac.
I suspect the reality will be somewhere in between, with a future of slowing but steady growth for this firm.
Petrofac is a company that has come a long way, growing from a minnow to a multi-billion pound company in the space of a decade. Over the course of the past ten years the share price has increased five-fold. But, after its recent rapid growth, net profit barely increased last year.
This news caused the share price to tumble. So let’s look at the numbers after the recent share price fall. The 2014 P/E ratio is predicted to be 12, falling to 9 in 2015. The consensus is that, after taking a breather this year, growth will resume.
Petrofac used to be a fast-growing small cap. Even if next year’s consensus estimate is too optimistic, Petrofac is shaping up to be a steadily growing blue-chip with a rising dividend yield to boot. The recent share price fall makes it a contrarian play as well.
As happens with many successful companies, this business is basically in transition from growth to value. But even with my value plays, I still want the company to be growing — Petrofac is exactly that type of company.
Regarded in this light, the company is very reasonably priced, and I think is definitely worth inclusion as part of your blue-chip/high-yield portfolio.