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Beleaguered Petrofac Pins Hopes On European Oil Services Recovery

To say these are worrying times for London-listed oilfield service (OFS) firm Petrofac (LON:PFC) would be a bit of an understatement. The FTSE 250 company is staring at a possible $530 million investor payout in a legal action linked to an alleged bribery scandal.

On February 6, 2019, David Lufkin, the company’s former global head of sales, pleaded guilty to offering corrupt payments in an attempt to bag contracts in Saudi Arabia worth $3.5 billion (£2.63 billion) and contracts in Iraq worth $730 million (£550 million).

The company has been under a U.K. Serious Fraud Office (SFO) investigation over alleged bribery, corruption and money laundering charges related to oil contractor and consultancy Unaoil.

Petrofac facility at Aberdeen Harbor, U.K. (Photo: Simon Dawson/Bloomberg)Copyright 2013 Bloomberg Finance LP

A matter of days after Lufkin entered a guilty plea, litigation funder Innsworth and law firm Keystone said that they are analyzing “potential claims” on behalf of shareholders to launch action against Petrofac.

Petrofac ought to be worried, for Innsworth has pedigree in lawsuits of this nature. It is also behind a shareholder claim against car giant Volkswagen over its emissions scandal. It is now engaging Petrofac investors who held shares from 2010.

The company’s saving grace – so far – has been that no charges have been brought against it, current officers, employees or board members. That hasn’t stopped its share price from taking two massive knocks in recent times – one in 2017 when the SFO action was initiated, and one earlier this month that saw it drop to as low as 395 pence from summer highs of 640 pence; a near 40% decline in the wake of Lufkin’s arrest. 

Its been clobbered by a downgrade from JPMorgan and a negative outlook issuance by rating agency Moody’s. But in troubling times, the company posted passable full-year financials on Thursday (February 28) to recover some lost ground. Revenue came in at $5.82 billion, down from $6.39 billion, while net profit came in at $64 million.

It’s ‘business performance’ metric for 2018, closely eyed by analysts, came in at $353 million representing a 2% decline from the $361 million tally in the preceding year, but smaller exceptional impacts meant that Petrofac could report the positive net profit versus its $29 million loss for 2017. The company also highlighted around $5 billion of new order intake and a $9.6 billion order backlog as of December 31.

What’s more, net debt was eliminated to a net cash position of $90 million, and Petrofac put its dividend at 38 cents per share. Ayman Asfari, Group Chief Executive, said the company had reported “good results that reflect solid execution and excellent progress.”

“Healthy new order intake reflects our strong competitive position. Our results have also benefited from the sale of non-core assets as we transition back to a capital light business. Together, these have returned Petrofac to a net cash position well ahead of schedule. Looking forward, we are well positioned for 2019 with good revenue visibility.”

There is a reason for buying into the Petrofac boss’ optimism as commentators reckon European OFS firms are in for better times in general. For instance, brokerage firm Berenberg believes that offshore spending has troughed, expects international capital expenditure to grow faster than U.S. expenditure through 2019-20 accompanied by a higher sectoral order intake.

It currently has a ‘hold’ rating on Petrofac, but remains optimistic on the future of the OFS sector as a whole with LNG as a key growth market “with up to $160 billion of capex waiting to be sanctioned.”

Undoubtedly that’s music to Petrofac’s ears. Of course, the company’s SFO investigation overhang continues. It says it is continuing to “engage with the SFO.”

“We reiterate that no charges have been brought against Petrofac or any other officers or employees. No current Board member of Petrofac Limited is alleged to have been involved in relation to the admission of offences by a former employee on February 6, 2019. In the absence of any charge or credible evidence, Petrofac intends as a matter of policy to stand by its employees.”

Whether further charges are brought against former or serving employees, or the Company, remains a question for the SFO and the prospect of shareholder action looms. For now the company is plugging away regardless, pinning hopes on an OFS industry uptick.

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