The Petrofac [PFC] share price has climbed 13% in the past 12 months, closing at 119.8p on 23 June. The stock hit a 52-week high of 195.45p in October last year following a settlement with the Serious Fraud Office in October. That came after Petrofac’s former head of global sales David Lufkin pleaded guilty to bribing contacts in the Middle East in order to win contracts for the company. The settlement enabled the energy group to bid for more contracts.
The oilfield services company has since been awarded the Mauritania well decommissioning project from Tullow Oil [TLW], which – alongside the rising price of oil – has boosted the company’s shares. The stock reached a year-to-date peak of 161.9p during intraday trading on 24 May.
However, many risks remain for the company, including headwinds in its engineering and construction division. As a result, it expects this part of the business to post an underwhelming performance in its upcoming trading update on 28 June.
Engineering and construction set to announce losses
There are many factors that may result in a disappointing trading update for Petrofac. For instance, the group recently announced that it is experiencing challenges in its engineering and construction division due to elevated costs from the Covid-19 pandemic. The division is expecting a small EBIT loss in 2022, which could also contribute to a full-year cash outflow.
Hargreaves Lansdown sees further pressures ahead. “It looks as though the absolute worst is over, but more recent news of lingering issues and inflation-related headaches, means a full rebound this year is a lot less likely,” the analysts wrote.
Therefore, even though full-year results will not be released until next year, the outlook is not overly optimistic. For example, according to consensus data compiled by Petrofac, seven analysts predict net profit to be only around $14m and revenues to decline to around $2.6bn.
However, there are some positive signs ahead of the trading update. Indeed, it has been reported that both the Asset Solutions and Integrated Energy Solutions divisions are performing well. This may help offset the poor performance expected from the engineering and construction division. In addition, the rise in oil prices may have prompted oil explorers and producers to increase their workload, which will have meant more business for Petrofac.
Inflationary pressures subdue revenue
Petrofac’s recent performance has not been overly strong. In its trading update for the 2021 financial year, Covid-related disruptions and unplanned disruptions meant that revenues declined 25% to $3.1bn. This was slightly higher than analyst forecasts of around $3bn.
Inflationary pressures also hit the group, with underlying cash profits falling from $211m to $104m. As inflation has risen since then, there is a risk that profit margins may have been squeezed further. The company has already stated that it expects revenue and margins to be “subdued” in the short term.
While many uncertainties exist regarding the upcoming trading update, there are positive signs for the company’s long-term future. At the end of May, it was revealed that Petrofac is collaborating with deep geothermal specialist CeraPhi Energy to “unlock an entirely new way of generating renewable power using existing oil and gas infrastructure”. As this aims to decarbonise the oil and gas industry, which is essential for combating climate change, it may help boost the Petrofac share price in the long-term. Alternatively, if the project proves unsuccessful, there is the risk that it could lead to further costs, thus depressing profit margins further.
Analysts upgrade Petrofac stock
Analysts are fairly confident about the potential for Petrofac shares to rise, as demonstrated by recent upgrades. For example, a few days ago, Jefferies raised its price target to 160p, up from 130p. It noted the company’s recent success in winning multi-year contracts, most recently in Australia, the Gulf of Mexico and the North Sea.
In May, JPMorgan also maintained its ‘overweight’ rating, raising its target price to 180p, up from 170p. According to the Financial Times, Petrofac has six ‘outperform’ ratings and four hold ratings. Its median price target is 180p, implying an upside of 50%.
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