Petrofac eyes comeback as boom time returns

It was already starting on the back foot, after being involved in a bribery scandal last year. The Serious Fraud Office investigated, eventually slapping the group with £77million of fines.

But it was a loss of business from the UAE and Saudi Arabia while the investigation was ongoing that stung.

With that chapter closed, Petrofac had been looking forward to a year of rebuilding. Unfortunately, Covid scuppered that.

The group’s been plagued by rising costs and lingering supply chain issues, causing projects to go over budget. That eats into profitability and means free cash flow this year is still expected to be negative.

If the group can’t reverse this trend, it’ll start to eat away at the balance sheet. Net debt more than doubled in June, as the group shelled out for fines and customers took their time to pay bills.

This is expected to improve in the second half but ultimately the group will need healthy cash flow to support longer-term growth. That’s not to say a recovery is out of the picture, just a little later than expected.

There’s $53billion (£44billion) in potential projects up for grabs over the next 18 months and Petrofac’s hoping to take a mighty slice.

With the industry booming and Saudi Arabia and the UAE back on the table, Petrofac may get its comeback after all.

There’ll be two things to watch out for to gauge the group’s progress. The most important is growth in the order book, which will tell us whether Petrofac is winning new clients.

The second will be cash flow. While Petrofac needs to win contracts, it can’t do so at all costs. It would be underwhelming to see aggressive bids eat further into profits.

The market is optimistic, since shares change hands for well above the long-term average.

However, this adds even more risk to the investment case. Missteps would not be well received.

This article is designed for investors who make their own decisions without advice. If unsure whether an investment is right for you, you should seek advice.

Shares can rise and fall in value so you could get back less than you invest.