The day before the Serious Fraud Office went public with its investigation into Petrofac, the oil services group’s shares stood at 814½p, giving the FTSE 250 company a valuation of more than £2.8 billion. In the weeks after May 12, 2017, Petrofac’s shares lost more than half of their value, dropping as low as 349p as investors took fright at the implications, including the clear potential for lost business.
Petrofac’s main executives were interviewed under caution by the fraud office as part of its inquiry into allegations of bribery, corruption and money laundering relating to the company’s dealings with Unaoil, a Monaco-based consultancy. Ayman Asfari, the chief executive, had his duties temporarily restricted; Marwan Chedid, the chief operating officer, was suspended and subsequently left; a non-executive director quit. Investors were worried that the company was in danger of spiralling into an unstoppable crisis.
Just over 15 months later, has the picture changed? Considerably. Petrofac maintains that it has not lost a single customer as a result of the inquiry; in fact, it has continued to win new business at an impressive rate and at margins management says it is comfortable with. It has sold off businesses in Mexico, Malaysia, Tunisia and the North Sea worth $794 million. The shares have recovered from their trough and, though down 8¼p at 651¾p yesterday, are not far short of their closing value of 700p on the day that the SFO’s investigation was revealed. But is all this enough to make for an investment case?
Petrofac was founded in 1981 in Texas with only 25 people. Today, it employs 12,750 staff across the world in 31 offices and last year had revenues of $6.4 billion and profits of $730 million before tax and other charges. Its main business activity is designing, building and operating oil and gas refineries in locations such as India and the Middle East. These are lumpy, fixed-price contracts where Petrofac is on the hook for cost overruns but profits if projects come in under-budget. It also pitches for maintenance and operations contracts and holds stakes in oil and gasfields, though it has been shedding them and hopes to convert them into maintenance and operations contracts.
Yesterday’s first-half results showed how a work in progress. Despite $3.3 billion of new orders during the six months to June, including a $600 million development project in Algiers, the group’s backlog of orders shrank to $9.7 billion, from $10.2 billion in December, suggesting that the company’s management is running fast to barely stand still. Petrofac reckons that the outlook for the second half is good and that its order book will end the year flat before it gradually begins to improve again over the next 12 to 18 months.
Its disposals have been of direct stakes in fields. They have been carried out at a fair clip, but prompted a hefty impairment hit because the proceeds were less than the carrying value of the assets on the books. In fairness to Petrofac, when it started to accrue them, the oil price was in the region of $100 a barrel, against about $76.50 now.
Net profit of $190 million before the impairments charge was better than expected and came against a 10.9 per cent drop in revenues compared with this time last year, highlighting its improving margins. Still, the results were flattered by the higher oil price, which lifted the value of the oil and gasfield stakes.
Petrofac is doing well, getting back to its core strengths of building, operating and maintaining refineries, reducing its exposure to projects that are capital-intensive. The risks are high, though, not only because of the SFO inquiry but also its ability to increase its order book long term.
Advice Avoid
Why The uncertainty over its ability to grow over the long term makes the risks too high
James Fisher
The chief executive of James Fisher compares his marine services business to an Oxpecker — a bird that sits on the back of a buffalo and keeps it free of irritants such as ticks and other insects.
It’s a good analogy. The group doesn’t get involved in the heavy industry of building wind farms or nuclear power stations, oilrigs or ships. Instead, it services them, sending its divers to inspect and test the infrastructure, moving cargos from ship to ship, transporting nuclear waste and even rescuing submariners in distress. In fact, James Fisher has its fingers in so many pies, from ports and terminals and renewable energy projects to providing services for customers such as the Indian navy and the offshore construction sector, that in many way it defies the tag of marine services.
It was founded in 1847 in Barrow-in-Furness by James Fisher as a traditional operator of shipping fleets. It has expanded over the years through a combination of organic growth and acquisitions and now employs 2,700 people in 18 countries, generating pre-tax profits last year of £49 million on revenues of £505.4 million.
In its first-half results yesterday, every indicator was on the up: profits, revenues, margins and the dividend. Every division showed an improvement, most notably Marine Support, its biggest unit, which lifted both revenues and operating profits by 21 per cent in the six months to the end of June, boosted by its work on the East Anglia One wind farm (where its tasks included disposing of a surprise discovery of unexploded bombs from the Second World War).
It has to be said that the strong performance was against a weak comparable period last year, where trading at its main business was weighted heavily towards the last six months. Nevertheless, James Fisher was confident about the outlook and the attractions of the company are not lost on the market.
The shares, off 2p at £17.82 yesterday, have risen by 62 per cent in the past five years and more than 13 per cent in the past two years. The stock trades at just over 22 times last year’s earnings and yields 1.6 per cent. Worth owning.
Advice Hold
Why Attractive diversity but returns don’t justify a buy
