Having been relegated from a FTSE 250 dividend-paying company to a troubled penny stock, energy services firm Petrofac’s (LSE: PFC) fall from grace may be complete. But I believe a turnaround beckons.
When its protracted bribery case finally reached a conclusion in 2021 and the Covid pandemic receded, investors hoped Petrofac may finally begin to rebuild its reputation. Instead, inefficiencies across the company’s value chain — ranging from cost overruns to payment delays — made matters worse.
As concerns surfaced over its balance sheet this year, Petrofac’s share price briefly slumped below 9p in April. Following a delay in the publication of results and a temporary share suspension, it resumed trading at sub-15p levels in June and has largely stayed there.
That’s after its biggest business unit – engineering & construction – posted an incremental loss of about $190m for the year, and full-year losses widened to $505m from $320m in the previous year.
Things might just get better
Heading for the exit may not be a wise idea for me right now, however, because things may just get better. Petrofac’s future projects book remains strong, and it has announced an aggressive turnaround plan predicated on restructuring.
It has reached near-term agreements with selected holders of its matured debt to “not take any action” during which time it is working furiously to get its act in order. That’s where Petrofac’s project book comes into sharp focus.
It claims to have a strong order intake of $7.1bn, driving significant backlog growth to $8.1bn. Alongside new deals in traditional energy, Petrofac has also posted a series of contract wins in the renewable energy segment.
Where from here?
Having spectacularly slumped from a reliable dividend stock to a high risk/reward penny stock, the pros of holding on to (or buying more) Petrofac shares, however strong, carry baggage.
Firstly, tough negotiations with its creditors, which will likely include substituting debt for equity, may dilute Petrofac’s value further for investors in the near-term. But returns may eventually follow for those playing the long game.
Secondly, practically every service project Petrofac is embarking on will be pegged to performance-guarantee requirements from clients. That can only be a good thing, in my opinion. It’s something a company in survival mode cannot afford to ignore, but there’s no guarantee that it will.
Thirdly, having been given a lifeline by creditors, Petrofac is speeding up the sale of its “non-core” assets. While good, further clarity is needed beyond its Thai Oil clean fuels project retreat.
Fourthly, at rock-bottom prices, a suitor may yet emerge to lift Petrofac’s share price. Or maybe not: just ask Wood Group, whose well-advanced takeover talks with Sidara collapsed recently owing to “market conditions.”
Overall, things are finely poised for Petrofac. Opinion is divided among analysts based on the outcome of the four factors I flag, with caution being expressed by brokers like JPMorgan and Berenberg.
My average holding price is just below 60p. It is a level at which I have much to lose by selling Petrofac at current prices. A debt-to-equity conversion may be on the cards, carrying dilution risks for existing shareholders like me. But it’s a risk I am willing to stomach with a longer-term view.
