Petrofac Limited (LSE: PFC) and Weir Group (LSE: WEIR) have suffered badly during the oil crash. Falling demand for their services combined with pressure to cut prices has hammered both firms' profits.
Shares in Weir have fallen by 60% over the last two years, while Petrofac is 42% lower. However, shares in both companies rose today after Weir and Petrofac published their 2015 results.
Is it time to take a fresh look at these two stocks?
Oil and mining services group Weir said that revenue fell by 22% to £1,918m last year, while pre-tax profits dropped 46% to £220m. The group reported adjusted earnings of 78.4p per share, matching consensus forecasts of 79p.
I've commented before that Weir's history of conservative dividend payouts could allow the firm to maintain its payout, and so it proved today. Weir announced a total dividend of 44p for the year, unchanged from last year. This gives an appealing 4.8% yield.
Although Weir's operating margin fell from 18.4% to 13.5% last year, cash generation remained strong. The dividend was covered by free cash flow and net debt fell by 4% to £825m. This looks reasonable to me, relative to operating profit of £259m.
Weir has continued to invest in new facilities and products and R&D spending rose by 17% last year. In my view this is a smart move -- this downturn won't last forever. However, I think that potential investors need to ask themselves two questions before deciding whether to buy.
Firstly, when market conditions improve, will Weir's profit margins return to historic levels? I suspect that pricing pressure from Weir's customers could continue for some time after commodity prices start to rise.
Secondly, do Weir's profits (and shares) have further to fall? The company said today it expects market conditions to remain "subdued" in 2016. Analysts are forecasting a further 10% drop in earnings per share this year. I wouldn't sell, but I'm not sure there's a big rush to buy.
Oil services firm Petrofac was one of this morning's big winners. As I write, the group's shares are up almost 8% to 799p.
Today's results revealed that Petrofac's revenue rose by 10% to $6.8bn last year, while adjusted net profit fell by 24% to $440m. However, the big surprise was probably that the group's order backlog rose by 10% to a new record of $20.7bn, despite industry-wide spending cuts.
One reason for this success is probably Petrofac's close relationships with national oil companies in the Middle East, which haven't cut spending in the same way as the western oil majors. For example, Petrofac secured $6.1bn of new orders in Kuwait and Saudi Arabia last year.
Instinct tells me to be cautious about the oil services sector, but I have to admit that Petrofac looks quite attractive. Net debt fell last year and the dividend was held at 65.8 cents per share. This gives a prospective yield of around 5.9%.
Petrofac confirmed its 2016 guidance this morning, suggesting that current forecasts for earnings of $1.27 per share are realistic. This puts the shares on a 2016 forecast P/E of just 8.8.
It's not without risk, but Petrofac looks a tempting buy, in my view.
However, commodity markets remain volatile. It might be worth considering buying opportunities elsewhere in today's market.
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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.