US broker Jefferies has upgraded its recommendation for Petrofac Limited (LON:PFC) to ‘buy’ while simultaneously slashing its price target for the troubled oil services group.
Petrofac shares have lost more than 50% of their value over the past few months after the firm was forced to suspend its chief operating officer amid a Serious Fraud Office investigation.
Attractive valuation
The sell-off has been as fast as it has been brutal, but analysts at Jefferies think it may have been overdone.
“The stock has taken a material fall following [last month’s] announcement that the SFO has commenced an investigation into Petrofac connected to its use of Unaoil for consultancy services,” wrote Mark Wilson in a note to clients this morning.
“Nonetheless, we see upside to the current share price and move to a ‘buy’ recommendation based on an attractive valuation.”
On top of his ‘buy’ rating, the analyst has set a price target of 500p – 10% higher than the current value, but a far cry from the 835p he’d set last time around.
US$200mln SFO fine
Although Wilson says that trying to quantify the SFO investigation “may well be a fool’s game”, he expects a fine of around US$200mln.
Importantly, he doesn’t think that will come into play until 2019 at the earliest.
“Petrofac has some blue-chip FTSE100 peers to give us a steer that investigations "usually" last multiple years before the quantum of a fine comes into view.”
Underlying business reasonably sound
Away from the SFO drama, the analyst thinks Petrofac is showing signs of ‘business as normal’.
He notes that the FTSE 250-listed group is “more than ever dependent” on its engineering and construction (E&C) business as it winds down its integrated energy services (IES) division.
Wilson has lowered his revenues estimates for this division (again) and is now looking for US$3bn in E&C contract wins in 2017.
Given that Petrofac has already announced US$2bn worth of awards so far, the analyst reckons the figure is a “viable target” which would show that the business “can continue near normal”.
Scrap the dividend
Wilson points out that, between now and 2020, Petrofac has almost US$1bn worth of debts maturities and finance lease commitments.
He recommends suspending the dividend in order to partially repay some of those as that would provide around US$665mln in cumulative free cash flow over the period.
Freeing up the cash would also help in refinancing discussions he adds.
House of cards?
As for full-year figures, Wilson is looking for an underlying profit of US$681mln (down from previous forecast of US$711mln), on revenues of US$6.8bn (previously US$7.1bn).
Of course, those numbers are useless if it turns out that Petrofac “truly is a deck of cards”.
The bullish note helped Petrofac shares rise 4.30% to 422.50p in afternoon trading.