Sudden large drops in share price on larger companies tend to spook investors, but they can also offer great opportunities, either to invest at a cheap price or even just to trade any bounce back towards previous levels. Market movements tend to be overdone in either direction, largely as a result of sentiment running away to a far greater degree than the actual facts or news means that it should, and therefore having a disproportionate effect on the market cap of the company. Is this the case with Petrofac (PFC), with last week over £500 million being wiped off of the value of the company when its shares dropped from around the 550p area to the current level of just under 400p?
The news that caused the drop was that a former employee of a Petrofac subsidiary had admitted bribery under the UK Bribery Act of 2010. Former global head of sales for a Petrofac subsidiary, David Lufkin, plead guilty to 11 counts of bribery relating to $6 million of payments to win contracts worth $4 billion in Iraq and Saudi Arabia. This news didn’t exactly come out of the blue though, as there has been a Serious Fraud Office ongoing investigation into possible bribery and money laundering dating back to May 2017. At the time that news came out, the share price dropped from around the 800p to lows of 358p over a period of a couple of weeks, before making a recovery. Based on the fact that all of this was known to the market and was part of the risk of investing in Pertrofac, I definitely think that half-a-billion being wiped off of its value as a result of this latest news seems very overdone.
The fact that Lufkin has already appeared in court and plead guilty seems strange if he had either been given a deal to implicate others, or was part of a larger group of people that would surely have all been charged together if they were all part of the same offences. That certainly doesn’t mean that further charges can’t be brought, although the fact that CEO Ayman Asfari and COO Marwan Chedid were both arrested at the time that the original scandal broke and were later released without charge, has to be a positive sign – I’d certainly have expected action against them by now, and also for the company to be charged alongside Lufkin if it had been proven that it was aware of what he was doing. Another factor which isn’t currently helping is a possible legal action by investors which would be funded by litigation expert, Innsworth, and would seek £400 million compensation for a shareholder action group set up on behalf of those who lost money as a result of the negative effects these allegations had on the share price – although I find it hard to understand how that will work unless some action is taken against Petrofac itself.
Financially, this FTSE250 company looks to be in decent shape and I’m not expecting any nasty surprises when the full year results are announced at the end of this month. The last trading update showed a strong pipeline of contracts, with $5 billion in new orders, and when added to existing deals, it equates to around $10.2 billion in total – plus the company will be tendering for up to $15 billion of work during the first half of 2019. It has also been changing the make-up of the business and trying to reduce the capital intensity of it by divesting non-core assets, and so far $0.5 billion has been realised as a result of this – for instance, it has just sold its stake in the oil field in the Greater Stella Area to Ithaca Energy for an upfront payment of $146 million, plus future payments of up to $145 million. This has helped to reduce net debt, not only by bringing in capital from the asset sales but also by reducing the capital expenditure on those assets, and as a result net debt is down to around $250 million – as compared to $600 million at the end of 2017. It also pays a fairly healthy dividend, especially at the current share price, and depending on the final dividend for 2018, that yield could be as high as 10% - depending on whether any money from the sale of assets is distributed - and should certainly at least be around 7%. It will be continuing to sell off non-core assets, although despite this total production for the whole of 2018 is expected to come within the 6-7 million barrel guidance level for the full year.
There is no doubt that there are risks here, but I don’t see them as being much higher than they were prior to the news of the Lufkin court case, and I wouldn’t be surprised to see this recover in the same way that it did back in 2017. I’ve a long position myself at a price of 397p, with a fairly wide guaranteed stop in place to protect myself against any further unexpected bad news causing further share price collapses. This position is more of a trade based on a bounce, than a long term investment, as I already have exposure to oil prices elsewhere.
Filed under: Petrofac, PFC, Frontera Resources, Chris Akers, Sabien, Justin the Clown, Ariana Resources
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