I’m a big fan of service companies, as they can profit however well or badly their customers perform. And I think they can offer investors some safety in the high-risk oil and gas business. Saying that, a look at the Petrofac (LSE: PFC) share price chart doesn’t exactly show ice-cool calm.
No, the sawtooth chart of the past 12 months looks like the kind of thing I could easily cut myself on. And if we look back further, the shares haven’t even started to recover from their Covid-19 pummelling.
Yikes, is this company destined to go bust in the wake of longer-term pandemic pain? No, judging by Petrofac’s first-half results, released Thursday, I don’t think so.
Pandemic
Chief executive Sami Iskander did confirm that the half was still blighted by Covid-related industry challenges. He also said: “Moving into the second half of 2022, a significant increase in bidding activity has put us firmly on the path to grow backlog over the full year“.
He added that “the outlook for the industry is robust and the work we have done over the past 18 months means that Petrofac enters this important period in a strong competitive position“.
The half was clearly tough. Total business revenue fell 23% compared to the first half of 2021. And the company reported a net loss of $14m (including one-off items).
Against that, Petrofac recorded an 18-month pipeline of $57bn, with a backlog of $3.7bn. So the firm’s future business stream looks healthy enough. And the longer-term nature of its order outlook suggests the company has better visibility than some.
Debt
The debt situation doesn’t look great, with net debt increasing to $341m. That’s what a free cash outflow of $193m can do for a company’s balance sheet. Hopefully that will start to improve. But Petrofac did say it only expects free cash flow in the second half to be broadly neutral.
It looks like the company should be safe from needing to find more cash, though. It reported liquidity of $511m at 30 June, and told us it remains within its banking covenants. The board expects year-end net debt broadly in line with the 30 June figure.
The absence of an interim dividend probably won’t surprise shareholders. But the company intends to reinstate a dividend policy “in due course, once the group’s performance has improved“.
So, a mixed bag. And it leaves me torn.
Two minds
Part of me wants to keep well away from companies that built up big debts during the pandemic. My thinking is that those are the ones most likely to suffer when the next crisis comes along, whatever it is. And the best way to invest defensively, surely, is to do it before we know what we’re defending against.
But I also think I see a company that’s come through a very tough time and is now showing early signs of a likely strong recovery.
With the current uncertainty, I think the share price could easily continue its up-and-down pattern. But I’m going to watch Petrofac’s second half very closely.
