The Petrofac (LSE: PFC) share price has fallen by more than 30% over the last year. Shares in the energy services provider are now worth 90% less than they were 10 years ago.
Petrofac’s problems are well known — the company has been under investigation by the UK’s Serious Fraud Office since 2017 and is struggling to rebuild its order book. However, Petrofac has new management and the SFO investigation must end at some point. I’ve been looking at the shares as a potential special situation buy.
A tough time for Petrofac
I’ll start with a word of warning. I see this as quite a high-risk situation. In my view, Petrofac’s share price could still have further to fall.
Once concern is that Petrofac’s revenue has fallen by nearly 50% since 2016. Although some of the company’s rivals have also seen their revenues fall over this period, Petrofac faces additional difficulties due to the SFO investigation.
This criminal probe has damaged the company’s reputation and appears to be limiting its ability to win new work. In March, Petrofac was barred from bidding on new contracts for UAE state oil company ADNOC — one of its oldest clients.
Petrofac also missed out on contract wins in Saudi Arabia and Iraq in 2019. I think this was probably linked to the SFO investigation too.
If Petrofac is eventually charged by the SFO, the company could end up facing a significant fine.
Right now, there’s no way to know what the final damage might be. In my view, that’s the main risk facing shareholders.
High risk, high reward?
Markets hate uncertainty. I think this is one reason for Petrofac’s weak share price performance. I think we could see a strong recovery if the SFO investigation concludes without the company being charged.
The business is now being run by a new chief executive, Sami Iskander, who has a history of senior roles with major western oil and gas companies. He’s committed to maintaining high standards of ethics and compliance, while extending the firm’s operations into the fast-growing renewable energy sector.
If Iskander’s strategy is successful, I think Petrofac’s performance could improve rapidly over the next two or three years. In my view, this is a classic high-risk, high-reward situation.
Petrofac share price: what I’d do
Broker forecasts suggest Petrofac will return to profit this year and deliver steady growth in 2022 and 2023. The latest consensus forecasts show earnings of 15.1 cents per share for 2021, doubling to 30 cents per share by 2023.
If the company can deliver on these forecasts, then I think there’s a good chance Petrofac’s share price could double over the next few years. But at this stage, I think there’s still a high degree of uncertainty about this.
Petrofac shares look reasonably priced to me, on around 13 times 2021 forecast earnings. But I’m not sure this provides me with enough margin of safety if things go wrong.
Petrofac’s rival Wood Group is priced on a similar valuation without the risk of the SFO investigation. I don’t like betting on uncertain situations when I buy stocks, so for me, Wood Group might be a better buy today than Petrofac.