Petrofac looking stronger amid SFO probe
OIL and gas engineer Petrofac announced a 20 per cent improvement in underlying profits last week, largely thanks to an improving oil price.
That’s not really how it’s meant to work in oil services. Developing oil fields is a long-term business and results shouldn’t bounce about with the oil price on a quarterly basis.
But Petrofac has a slug of oil and gas assets of its own – $794million (£612milion) to be exact. A better oil price has shifted that division from a $19million loss last year to a $16million profit this time round.
There’s less to shout about in the core engineering businesses. But given recent headwinds good news is not to be sniffed at. In the interest of addressing the elephant in the room early on; the Serious Fraud Office (SFO) investigation into Petrofac is ongoing.
The probe focuses on the relationship with Unaoil, a company Petrofac hired to provide local consultancy services.
Petrofac denies any wrongdoing, but could face significant fines. The outcome of that investigation will probably determine performance in the near term.
Looking further ahead there’s a lot more to Petrofac. Margins have been improving steadily, and management have been ruthless in cutting costs. Cash profits are progressing as a result.
Low oil prices meant energy companies tightened purse strings, commissioning fewer new projects.
That wasn’t great news for companies like Petrofac, which develop new fields, and the order book shrank dramatically.
Recent contract wins, weighted towards the Middle East and North Africa, have provided some relief and mean the slide is slowing. Margin gains suggest Petrofac isn’t having to sell its services at rock bottom to land contracts either. Debt is a bit of a blot on the copybook at the moment, but a glut of asset sales should deal with that, and bar a major oil crash the group has more than enough financial headroom to see it through the near term.
Overall we think Petrofac is looking stronger, but with the SFO investigation hanging over the company, it’s hard to say things are stable.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”