US Edition Petrofac
£11.23-3p
Questor says SELL
OIL and gas services group Petrofac [LON:PFC] reported a record order book in its interim results yesterday, and if it can successfully convert that work into profits the shares should surge. However, Questor is concerned that with debts on the rise there is also a fair amount of risk in holding on to the shares.
Investors in Petrofac are a patient bunch. The shares have fallen 12pc during the past 12 months after contracts expected to start in 2014 have been delayed until next year.
The company said as recently as May that profits would be hit by delays in the Greater Stella Area project in the North Sea and lower-than-expected production in Romania’s Ticleni project.
With projects being delayed the work is piling up. The backlog of work, which mainly involves designing and building both onshore and offshore oil platforms, has increased to $20.3bn (£12.2bn) from $14.3bn at the same stage last year. That now represents more than three years of the $6.4bn in revenue forecast for 2014.
Questor can see the attraction to bargain hunters with the shares in this FTSE 100-listed group trading on 11 times forecast earnings and offering a prospective dividend yield of 3.3pc.
However, sticking to the numbers we have in front of us now it is far less rosy. The company said yesterday revenue was down 9.2pc, to $2.53bn, and pre-tax profits slumped by 37pc, to $188m in the first six months ended June.
Tim Weller, chief finance officer, said the company was still confident of a strong second half, and meeting market expectations of net income of up to $600m. Market consensus is for pre-tax profits $734m, giving earnings per share of 168c (101p).
Questor thinks that leaves much to do for the rest of the year and while investors wait for the projects to be profitable the risks are increasing.
Petrofac’s net debt – total debts less cash – more than quadrupled to $1.3bn at the end of June, from $370m at the same stage last year. It has since fallen to about $900m following asset sales in August.
Spending is normal practice in advance of major projects, and debts would be expected to rise, but it also increases risks to investors. Questor thinks that investors cash would be better placed elsewhere. Sell.