The share price of Petrofac (LSE:PFC) continued to collapse this week, falling a further 27%. The stock has been on a downward trajectory since 2017, falling from £9.17, to £1.95 in 2020, and finally £0.96 today. Overall, that’s nearly a 90% loss over four years.
Yet ignoring the pandemic’s impact, the business appears to have done relatively well throughout that period. Petrofac became profitable, total debt dropped by 40%, and its liquidity grew stronger. So why is the Petrofac share price falling? And is this a buying opportunity for my portfolio? Let’s take a look.
What’s going on with the Petrofac share price?
Petrofac is an international services company for the energy sector. It designs, builds, manages, and maintains infrastructure on behalf of its clients, providing far more flexibility for leading energy companies like BP.
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The Petrofac share price began falling in 2013 due to rising debt and weakening revenue concerns. However, the real problems began in April 2017. The serious Fraud Office (SFO) announced an investigation into the firm, which led to the immediate suspension of Marwan Chedid – the chief operating officer at the time.
Since then, things only appear to have got worse. In 2019, David Lufkin, the former head of sales, pleaded guilty to 11 counts of bribery. He was found guilty of another three counts in January this year, which ultimately led to the stock sell-off on Monday this week.
Why? Because beyond the reputational damage, this latest conviction led the Abu Dhabi National Oil Company (ADNOC) to suspend Petrofac from competing for any new contracts indefinitely. In other words, Petrofac just lost access to one of its key growth markets.
Is there a chance of recovery?
This is undoubtedly terrible news that will significantly impact the future of Petrofac and its share price. At least that’s what I think.
But it may not be a complete catastrophe. Due to the nature and complexity of Petrofac’s services, it has created some substantial switching costs for its clients. And so I don’t believe its existing projects will be significantly affected by this latest development in the scandal. Even ADNOC has agreed to allow Petrofac to continue its projects already under way before the recent suspension.
Also, as I mentioned before, the financials of the business have seen some improvement. Even with all the disruptions from Covid-19, Petrofac still managed to reduce its total debt by $200m thanks to its substantial cash reserves.
The bottom line
The investigation into Petrofac is still ongoing and may uncover more criminal activity in the future. However, these investigations typically last four years, indicating it may soon be over. At which point, the company will have to begin the long journey of repairing its reputation.
If successful, the Petrofac share price may recover to its pre-scandal levels over the long term, and thus potentially become a classic turnaround story. But for now, it serves as a good case study of how much damage can be inflicted when a business breaches regulations. It’s a risk all investors should consider, I feel.
Personally, I’m waiting to see how much impact the ADNOC contract suspension has on the business throughout 2021. So for now, I won’t be adding the stock to my portfolio.
