Rising oil prices could make Petrofac Limited and Go-Ahead Group plc buys for 2017

The Motley Fool
Petrofac oil pipes
Petrofac oil pipes

Shareholders of oil services group Petrofac (LSE: PFC) and bus and rail operator Go-Ahead Group (LSE: GOG) will be hoping that 2017 is a better year than 2016.


I think there's a good chance that both companies will benefit from higher energy prices in 2017. Petrofac's customers may start to commission more new projects, while higher petrol and diesel costs should help to push travellers back onto buses and trains.

However, both companies have issued trading statements today that suggest challenges remain. Go-Ahead's rail profits are likely to fall below expectations this year, due to the impact of strike action on Southern Rail. Meanwhile Petrofac's backlog of orders has fallen markedly since the end of June.

Am I still right to view both stocks as a buy for the year ahead?

The bad news is in the price

Go-Ahead said this morning that passenger revenues on the Govia Thameslink franchise (which includes Southern Rail) are expected to fall by 4% during the current half year. The group's other rail franchises are performing well, with revenues up by between 2.5% and 5.5%.

The more profitable bus operations are in much better health. Revenue has risen slightly during the first half, and profits are expected to be in line with expectations.

The fact that Go-Ahead is losing money as a result of the Southern Rail strike action isn't likely to surprise anyone. The group's shares haven't fallen after today's news, and have actually gained 6% over the last month.

I think this is an appropriate reaction. Go-Ahead's balance sheet is in good shape and the group generates a lot of cash. Last year's dividend was comfortably covered by free cash flow, for example.

The current strike disruption won't last forever. In the meantime, the company is bidding for a number of new bus and rail operations overseas. Go-Ahead currently trades on a forecast P/E of about 11, with a prospective yield of 4.8%. In my view this remains an attractive entry point for patient investors.

A worrying shortfall?

I have to admit that I was expecting better news from Petrofac this morning. Although full-year net profit is expected to be in line with expectations, at $410m, the group's other figures were more mixed.

Order backlog fell from $17.4bn to $14.5bn between 30 June and 30 November. At the end of last year, the order book was worth $20.7bn, so it's now fallen by 30% in eleven months. That's quite a big decline.

However, there are signs of progress. New order intake was $1.4bn during the second half of the year, up by 40% from $1bn during the first half.

It's also worth remembering that the oil market is only just starting to recover. If recent oil price gains hold firm over the next few months, I'd expect the outlook for Petrofac to improve steadily next year.

At the time of writing, Petrofac shares are down by 5%, at about 865p. This puts the stock on a forecast P/E of about 11.6, with a potential dividend yield of 6.0%. I believe this represents good value.

You can't afford to ignore this

If you're looking for turnaround stocks with good income potential, then I believe you cannot afford to ignore A Top Income Share From The Motley Fool. We believe this UK-focused mid cap could be significantly undervalued at current levels.

Our analysts' view is that the group's profits could rise considerably over the next few years. In the meantime, this company's shareholders are enjoying a strong dividend yield.

If you'd like to know more, then I urge you to download this free, no-obligation report today. To get your copy, simply click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.