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Petrofac - Shares fall 19% on Serious Fraud Office investigation

Nicholas Hyett | 25 May 2017 | A A A
Petrofac - Shares fall 19% on Serious Fraud Office investigation

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Petrofac Ord USD0.02

Sell: 114.45 | Buy: 117.00 | Change 2.60 (2.31%)
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Shares in Petrofac fell 19.5% after the oil services group released further detail about the Serious Fraud Office's (SFO) investigation into the group's relationship with Unaoil and other agents.

In 2016 the Board commissioned an independent investigation into Petrofac's relationship with Unaoil, a Monaco based company which it hired to provide local consultancy services primarily in Kazakhstan between 2002 and 2009. The Board shared the findings of this investigation with the SFO. The SFO has since informed Petrofac that it does not accept those findings and that it does not consider the Company to have cooperated with it, as that term is used in relevant SFO and sentencing guidelines.

Earlier in the month, CEO Ayman Asfari and Chief Operating Officer Marwan Chedid were arrested and questioned under caution by the SFO, and released without charge. Mr Chedid has since been suspended, and has resigned from the Board. Mr Asfari remains as CEO but has stepped down from the Nominations Committee and will have no role in the investigation.

Our View

The announcement of a wide ranging Serious Fraud Office (SFO) investigation in May has rendered recent operating success all but irrelevant. The shares have fallen more than 45% since details first emerged, and it has embroiled much of the company's senior management team.

The impact of the SFO investigation is almost impossible to predict, but Petrofac can at least say that many of the operating challenges the group faced in 2016 are behind it.

The Laggan-Tormore gas project, with its associated cost overruns, has been handed over. A recovering oil price means write downs in the IES business, which handles the group's investments in oil and gas fields, are hopefully behind us. True, the giant JSD6000 rig-lifting barge looks set to remain in limbo for now, but a recovering oil price should at least increase the appetite of potential buyers.

The core engineering businesses, which account for the lion's share of profits, are looking healthier, with profits running slightly ahead of expectations for the full year. However, with new projects awards slowing to a trickle, this is coming at the expense of the backlog.

SFO aside, that's Petrofac's current problem. Oil prices may be recovering, but E&P companies were too badly scarred by the crash to start splashing large sums on new projects straight away. If new orders remain in the doldrums, Petrofac's huge order book will start to drain away. Even the group's impressive cost cutting can't offset a lack of projects to work on.

Fortunately, Petrofac's business is weighted towards the Middle East and North Africa. Given those regions often have low production costs, reflecting onshore locations, that's a big advantage. If projects are going to be commissioned anywhere, it's here.

Overall, Petrofac looks pretty well placed at an operating level, despite industry wide challenges. However, it's the SFO investigation that's likely to drive the shares in the near term. Before the most recent announcement, Petrofac traded on a P/E ratio of 7.15 times , compared to a longer run average of 10 times. It will be lower now.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.