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Having been relegated from a FTSE 250 dividend-paying firm to a troubled penny inventory, power companies agency Petrofac’s (LSE: PFC) fall from grace could also be full. However I consider a turnaround beckons.
When its protracted bribery case lastly reached a conclusion in 2021 and the Covid pandemic receded, buyers hoped Petrofac might lastly start to rebuild its popularity. As an alternative, inefficiencies throughout the corporate’s worth chain — starting from value overruns to fee delays — made issues worse.
As issues surfaced over its steadiness sheet this 12 months, Petrofac’s share value briefly slumped beneath 9p in April. Following a delay within the publication of outcomes and a short lived share suspension, it resumed buying and selling at sub-15p ranges in June and has largely stayed there.
That’s after its largest enterprise unit – engineering & building – posted an incremental lack of about $190m for the 12 months, and full-year losses widened to $505m from $320m within the earlier 12 months.
Issues may simply get higher
Heading for the exit is probably not a clever concept for me proper now, nonetheless, as a result of issues could get higher. Petrofac’s future tasks ebook stays robust, and it has introduced an aggressive turnaround plan predicated on restructuring.
It has reached near-term agreements with chosen holders of its matured debt to “not take any motion” throughout which period it’s working furiously to get its act so as. That’s the place Petrofac’s undertaking ebook comes into sharp focus.
It claims to have a powerful order consumption of $7.1bn, driving vital backlog development to $8.1bn. Alongside new offers in conventional power, Petrofac has additionally posted a collection of contract wins within the renewable power section.
The place from right here?
Having spectacularly slumped from a dependable dividend inventory to a excessive danger/reward penny inventory, the professionals of holding on to (or shopping for extra) Petrofac shares, nonetheless robust, carry baggage.
Firstly, robust negotiations with its collectors, which can seemingly embody substituting debt for fairness, might dilute Petrofac’s worth additional for buyers within the near-term. However returns might finally comply with for these taking part in the lengthy sport.
Secondly, virtually each service undertaking Petrofac is embarking on can be pegged to performance-guarantee necessities from purchasers. That may solely be a superb factor, in my view. It’s one thing an organization in survival mode can not afford to disregard, however there’s no assure that it’s going to.
Thirdly, having been given a lifeline by collectors, Petrofac is rushing up the sale of its “non-core” belongings. Whereas good, additional readability is required past its Thai Oil clear fuels undertaking retreat.
Fourthly, at rock-bottom costs, a suitor might but emerge to carry Petrofac’s share value. Or possibly not: simply ask Wooden Group, whose well-advanced takeover talks with Sidara collapsed just lately owing to “market situations.”
General, issues are finely poised for Petrofac. Opinion is split amongst analysts based mostly on the end result of the 4 components I flag, with warning being expressed by brokers like JPMorgan and Berenberg.
My common holding value is just under 60p. It’s a degree at which I’ve a lot to lose by promoting Petrofac at present costs. A debt-to-equity conversion could also be on the playing cards, carrying dilution dangers for current shareholders like me. However it’s a danger I’m prepared to abdomen with a longer-term view.
