Royal Dutch Shell plc vs Petrofac plc: which oilie should you buy right now?

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Petrofac oil pipes

News that the Serious Fraud Office (SFO) is investigating oilfield services giant Petrofac(LSE: PFC) has played havoc with the company's share price over the past month.

It has seen its stock value dive 57% since reports of the SFO probe emerged just under a month ago. The stock is now dealing at levels not seen since January 2009, and I reckon contrarian investors are right to sit on their hands right now as newsflow steadily worsens.

SFO strain

The SFO advised on May 12 that it was investigating Petrofac "for suspected bribery, corruption and money laundering" as part of its probe into Monaco-based Unaoil. Petrofac engaged Unaoil to provide local consultancy services, chiefly in Kazakhstan, between 2002 and 2009.

And the bad news has kept on coming since. Less than a fortnight later Petrofac said COO Marwan Chedid -- who had been interviewed by the SFO along with chief executive Ayman Asfari -- had been suspended, although it was quick to point out that "these actions do not in any way seek to pre-judge the outcome of the SFO's investigation."

As if this wasn't alarm enough, Petrofac added that the SFO had rejected the findings of an independent investigation it had launched into Unaoil last year. And to cap off a hat-trick of woe, Petrofac advised that the SFO "does not consider the company to have cooperated with it, as that term is used in relevant SFO and sentencing guidelines."

Cheap but risky

Some may argue that Petrofac's high risk profile is baked in at current prices. For 2017, City predictions of a 16% earnings uplift leave the oilfield services giant dealing on a P/E ratio of 4.2 times, some way below the widely-regarded bargain benchmark of 10 times.

However, the size of any potential penalties that could be imposed should any wrongdoing be ascertained are impossible to quantify right now, particularly as the SFO investigation is tipped by many to rumble on for at least the next few years. And of course the impact of an adverse result on the firm's reputation could seriously hamper Petrofac's ability to win business looking ahead.

Aside from these more immediate legal issues, the uncertain state of the oil market adds an extra layer of risk to Petrofac's outlook, troubles which are expected to persist for some time. Indeed, the Square Mile expects a backdrop of sustained capex budget pressure across the oil industry to push earnings into reverse again next year (a 16% decline is currently anticipated at Petrofac).

Don't shell out

This patchy industry outlook is also encouraging me to keep steering clear of Royal Dutch Shell (LSE: RDSB).

Brent values have dipped back below $50 per barrel in recent sessions, and I believe prices have much further to fall as shale producers get back to work. Latest Baker Hughes data showed the US rig count up for a 20th consecutive week, to a total of 733 units, up 11 week-on-week.

While the City expects earnings to bounce 195% higher in 2017, this is dependent on crude values snapping out of their recent decline, a hard ask as insipid demand keeps inventories locked around record levels and output hikes in the States overshadow the impact of OPEC production freezes.

The prospect of a prolonged supply/demand imbalance has seen brokers downgrade their earnings forecasts and I reckon further downgrades could be around the corner, particularly given the driller's slightly-toppy forward P/E ratio of 16.1 times.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.