Last week, the Petrofac (LSE: PFC) share price crashed to record lows. The penny stock ended Friday (1 December) at just 17p – about 80% below the level it was at a year earlier.
So what’s going on with the UK oilfield services company? And is there an investment opportunity for me here after this massive share price fall?
Why the share price tanked
The share price fall is related to concerns over Petrofac’s financial position. Recently, a number of brokers including Berenberg and JP Morgan have flagged balance sheet concerns.
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On Friday, Berenberg said that the company is in a “precarious” position due to the fact it has roughly $250m worth of debt due to mature in October 2024. It has placed Petrofac shares ‘under review’, removing their rating and price target.
“We expect the company’s trading statement on 20 December to address some of these concerns, but whether liquidity has materially improved remains highly uncertain,” wrote Berenberg’s analysts.
“In a worst-case scenario, Petrofac may be forced to renegotiate its financing agreements, potentially leaving shareholders significantly diluted,” they added.
Meanwhile, analysts at JP Morgan said the company’s balance sheet could be an obstacle for the company going forward.
Taking a closer look
Digging deeper, the balance sheet certainly looks stretched. At the end of June, the company had net debt of $584m on its books versus $349m at the end of 2022. That’s high given that a) the company’s market is just £88m and b) it generated an operating loss of $122m for the first half of the year.
The company also mentioned that during H1 it had a net working capital outflow due to delays in the settlement resolutions required to secure cash collections. These delays are concerning.
It’s worth noting that, according to Reuters, Petrofac’s combined credit score on LSEG – which measures how likely a company is to default on its debt in the next year on a scale of one (highly likely) to 100 (very unlikely) – is one.
My own data provider gives the stock an Altman Z2 score of -1.76, which indicates a ‘serious risk’ of financial distress within the next two years.
Should I buy?
Now it’s not all negative here. Back in August, Petrofac said it had seen a major increase in its order backlog. At 30 June, the group backlog was standing at $6.6bn versus $3.4bn at the end of 2022.
The group also said it was “well positioned” to continue growing its backlog and that it had a healthy pipeline scheduled for award in the next 16 months.
However, this backlog growth isn’t enough to get me interested in the stock.
I’m concerned about the balance sheet weakness. I’m also concerned about the level of short interest here. Currently, Petrofac is the second most shorted stock on the London Stock Exchange. This indicates that a lot of sophisticated investors expect the share price to continue falling.
Add in the fact that the company is expected to generate a large loss for 2023, and the investment case is pretty murky, to my mind.
All things considered, I think there are much better stocks to buy for my portfolio today.
