Should you buy, sell or hold Petrofac Limited after today's announcement?
Oil and gas industry services company Petrofac(LSE: PFC) today announced the winning of a gas project in Oman worth almost US$600m.
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Hefty contract wins like this strike me as a sign that the industry is moving on after crunching its gears with the collapse of the price of oil and other resources over the last few years. Maybe now is a good time to buy, or hold onto, stocks such as Petrofac.
A strong presence in Oman
Petrofac signed the deal with a subsidiary of Oman Oil Facilities Development Company LLC (OOFDC), and the work involves the engineering, procurement and construction (EPC) of OOFDC's Salalah LPG extraction project in the southern part of Oman.
Under the contract, Petrofac will construct the liquefied petroleum gas (LPG) unit and associated facilities, including tie-ins to existing pipeline infrastructure, together with LPG storage and jetty facilities at the Port of Salalah.
Petrofac's group chief operating officer, Marwan Cheidd, says the contract is the firm's 11th in the Sultanate and reinforces Petrofac's commitment to Oman. The company has been doing business there since 1988.
In 2015, Petrofac's revenue came in around $6,844m, so this one deal won't transform the company. However, I find it encouraging that deals like this are flowing in the industry and for Petrofac.
Return of the oil bull?
The oil price touched lows below $30 at the beginning of 2016 and today's $56 or so indicates a decent recovery. I'm tempted to believe that the early 2016 low might act as a floor for the price of oil. Indeed, many observers and commentators are predicting a return of the oil bull market from here, pointing to an agreement between Russia and the OPEC oil supplying nations led by Saudi Arabia to reduce the global supply of oil in an effort to boost the price.
Such efforts combine with a positive outlook for economic activity in 2017 to make me optimistic about the price of oil and Petrofac's potential as an investment. However, I keep my own analysis of Petrofac's attraction as a stock as simple as possible and find well-known outperforming fund manager Neil Woodford's approach useful. He reckons his total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth. On that score, Petrofac is appealing right now.
Cyclical value
At today's share price of 925p, Petrofac's dividend yield runs at 5.6% and City analysts following the firm expect the payout to increase around 4.3% in 2017. Forward earnings look set to cover the dividend around 1.8 times. To me, Petrofac looks attractive, so I plan to continue holding and will view any increased earnings due to further oil price recovery as a bonus.
Although recent oil price lows could form a bottom on the chart there's no doubt that Petrofac operates in a cyclical industry. To me, that means the firm deserves its low forward price-to-earnings rating that runs around 9.5 for 2017. So I'm not expecting a valuation uprating, just steady operational progress as exemplified in today's contract win announcement.
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Kevin Godbold owns shares in Petrofac Limited. 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.
