The Petrofac (LSE:PFC) share price has fallen by 88% over the past five years. And since May last year, it has halved. But since the end of March, the stock has climbed by 40%.
This turbulence makes me want to investigate further.
A brief history
Petrofac designs, builds, manages and maintains energy infrastructure assets. The company has embraced the move towards green energy with the development of wind turbines. However, it’s still heavily exposed to the oil and gas sector.
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But the firm has a controversial past.
In October 2021 it was found guilty of failing to prevent some of its employees from offering bribes to secure contracts. It was fined £77m by the Serious Fraud Office. It was also suspended from bidding on contracts offered by Abu Dhabi National Oil Company (ADNOC), an important customer.
Petrofac is also loss-making and has seen its revenue decline over the past five years. Due to the uncertainty caused by the pandemic, the energy industry scaled back investment. This affected the business badly. It also has some legacy contracts that are unprofitable.
The business has borrowed heavily in recent times. Net debt increased from $144m at the end of 2021 to $349m, a year later.
During the same period the order book has fallen from $4bn to $3.4bn.
| Financial year (31 December) | Revenue ($m) | Operating profit/(loss) ($m) | Net profit/(loss) ($m) |
| 2017 | 6,395 | 104 | (27) |
| 2018 | 5,829 | 159 | 61 |
| 2019 | 5,530 | 220 | 66 |
| 2020 | 4,081 | (160) | (201) |
| 2021 | 3,038 | (196) | (242) |
| 2022 | 2,591 | (217) | (337) |
From an investment perspective, I’d normally run a mile from a firm like this.
Positive news
But at the end of March, the company announced that it had successfully bid on a contract with Hitachi to supply offshore (North Sea) wind assets to TenneT, the Dutch-German equivalent of National Grid.
Petrofac’s share of revenue from the deal is expected to be €6.5bn. Its shares closed 70% higher on the day the news was announced.
It has also recently extended $252m of its banking facilities to October 2024. Part of the renegotiation involved a change to the covenants which means it’s less likely to breach the terms of the new agreement.
And ADNOC is letting Petrofac bid for its contracts once more.
Conundrum
Whenever a company has been involved in a major scandal — and has paid a heavy price both from a financial and reputational perspective — I think it’s highly unlikely to be repeated. This may be a naive view but with increased scrutiny from regulators, investors and competitors it would surely be the end of Petrofac were it to repeat previous misdemeanours.
My decision on whether to invest therefore comes down to an assessment of its future financial performance, and what return I could make.
I think Petrofac has turned the corner. The directors are expecting the company to be cash neutral in 2023 with some positive potential. However, I believe it has a long way to go before it delivers the results that a listed firm should.
I could also earn a dividend from investing elsewhere. The directors of Petrofac aim to reinstate one once its performance improves. But they’re silent as to when this might happen.
Investing in Petrofac at this time would be a little too risky for me. I’m a cautious investor and will be looking elsewhere for opportunities. However, I’ll be keeping the stock on my watch list and monitoring the performance of the company with interest.
