The Petrofac (LSE: PFC) share price seems firmly tied to the price of oil, and now that it’s slipped back from the heady $85 levels of barely a couple of months ago, so have the wheels come off the Petrofac price recovery.
The shares were flying high in early October, but a 25% slump since then has put the price on a loss of 2.4% since the start of 2018 — though that’s still better than the FTSE 100’s overall 9% loss.
If oil prices fall, so does revenue for the big oil producers, and they have less money to spend on the infrastructure services provided by companies like Petrofac. Or so the idea goes, but I think that’s missing the long-term picture.
Oil seems to have settled around the $60 level for now, and I really expect long-term prices to be higher than that. I doubt we’ll see $100+ prices again for a long time, but even $65-$75 is plenty for the oil business to be seriously profitable. And I can’t see how Petrofac won’t get a chunk of the resulting infrastructure business.
What risk?
The only real risk I can envisage is if the company is fragile in the short term, and I just don’t see that. Peter Stephens sees Petrofac’s recovery potential as sound, pointing to recent operational performance improvements, and this year’s first half looked impressive.
Though the company recorded a $17m net loss, that did include exceptional items of $207m, and the firm had enjoyed $3.3bn in new order intake in the period to 30 June (for a total order backlog of $9.7bn). Net debt stood at $0.9bn, which I don’t see as a problem against those figures. And since then we’ve seen more new orders, with big project wins in Algeria and Thailand.
The next two years should see EPS falls, but a forward P/E of only 6.5 and a forecast dividend yield of 5.7% makes the shares look oversold to me.
Another prospect
Engineer John Wood Group (LSE: WG) looks to be in a very similar position, providing design, production support and industrial gas turbine services to the oil and gas and the power generation industries.
Wood’s 2018 recovery has also come off the tracks since oil started sliding back, and a 20% slump since the beginning of October has left the shares on an overall loss of 3.7% since the start of the year.
Like Petrofac, John Wood is also winning some tasty new contracts, with a $43m steel pipeline contract in Texas announced Wednesday. The company said: “We have the largest and most vertically integrated pipeline project offering in North America and this win strengthens our position as a major midstream player.”
That comes on top of contracts in Abu Dhabi totalling $53m announced earlier in the month, extending the firm’s run of such deals this year.
Solid orders
Exceptional items led to a reported loss at the halfway stage, but pro forma revenue was up 13.4%. Debt did rise significantly, to $1.6bn, but a very strong order book of $10.6bn again takes the sting off that in my view.
We’re looking at a forward P/E of 11.7 for 2019, which is on the back of a forecast return to strong EPS growth, and dividends should yield 4.3%.
Again I see an attractive long-term recovery stock here.