FTSE 250 stock Petrofac yields almost 7% but is it worth the risk?

The Motley Fool
Silhouette of an oil rig
Silhouette of an oil rig

Thanks to the erratic oil price, shares in FTSE 250-listed service provider Petrofac(LSE: PFC) have lost 33% of their value in less than three months.

Does a more attractive valuation, not to mention sizeable dividend, make this a company worth investing in? Based on the reaction to today’s pre-close update for the full year, at least some market participants think so.

“Solid progress”

This morning, Petrofac said it was trading in line with expectations and that it had secured $5bn worth of orders from both core and growth markets in the year to date. Considering the competitive environment in which it operates, that’s not bad at all.

In addition to winning contracts in markets such as in Thailand, India and The Netherlands, the company also said it was currently bidding on “more than” $15bn of tenders that would be awarded in the first half of next year.

Elsewhere, “solid progress” had been made on delivering engineering and construction (E&C) projects in Kuwait and Abu Dhabi, while extensions to engineering and production services (EPC) contracts helped make up for “a challenging market environment for brownfield projects in the North Sea.

Partly as a result of lower capital expenditure, Petrofac’s debt pile continues to shrink, from $600m last year to “around” $250m at the end of 2018. CEO Ayman Asfari highlighted that the company had made “excellent progress” in becoming a capital-light business — having now sold $8bn of non-core assets — and would continue to “review options” for those that remain.

Full-year numbers will be confirmed on 28 February. For now, the stock trades on 6 times forecast earnings for the next financial year and comes with a secure-looking, near-7% yield. That may be cheap, but it’s worth keeping in mind a couple of risks.

Firstly, Petrofac’s fortunes rest on something it can’t control, namely the price of black gold. Having already fallen over 30% in just a couple of months, due to fears of oversupply in the US (now the world’s largest producer), there’s no saying it won’t drop further in the short term. Secondly, you can expect further selling pressure if the outcome to the ongoing investigation by the Serious Fraud Office is negative.

All told, I’d be more inclined to buy industry peer Wood Group(LSE: WG), currently.

Contract wins

Following hot on the heels of last week’s announcement that it had penned a contract to provide engineering, procurement and construction services to support a “world-class plastics manufacturing facility” in the US, the £3.6bn-cap revealed this morning that it had also secured a $66m deal to provide digital control technologies to the Sellafield nuclear site.

The 10-year contract includes “all stages of system design, manufacture and assembly of equipment” and, according to the energy services business, helps justify the acquisition of Amec Foster Wheeler last year.

Like Petrofac, the firm’s shares have been volatile and now trade 15% below where they were at the start of 2018. Based on today’s price, Wood’s stock currently changes hands on 9 times earnings for 2019 and comes with a 5.3% yield, covered twice by profits.

If you’re considering taking the plunge on either company, I’d say it’s more important than ever to ensure that your portfolio is suitably diversified and that your holdings match your risk tolerance and investing horizon.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.