Questor share tip: Petrofac downgraded to sell as risks rise

With projects being delayed the work is piling up. The backlog of work, which mainly involves designing and building both onshore and offshore oil platforms, has increased to $20.3bn (£12.2bn) from $14.3bn at the same stage last year. That now represents more than three years of the $6.4bn in revenue forecast for 2014.

Questor can see the attraction to bargain hunters with the shares in this FTSE 100-listed group trading on 11 times forecast earnings and offering a prospective dividend yield of 3.3pc.

However, sticking to the numbers we have in front of us now it is far less rosy. The company said yesterday revenue was down 9.2pc, to $2.53bn, and pre-tax profits slumped by 37pc, to $188m in the first six months ended June.

Tim Weller, chief finance officer, said the company was still confident of a strong second half, and meeting market expectations of net income of up to $600m. Market consensus is for pre-tax profits $734m, giving earnings per share of 168c (101p).

Questor thinks that leaves much to do for the rest of the year and while investors wait for the projects to be profitable the risks are increasing.

Petrofac’s net debt – total debts less cash – more than quadrupled to $1.3bn at the end of June, from $370m at the same stage last year. It has since fallen to about $900m following asset sales in August.

Spending is normal practice in advance of major projects, and debts would be expected to rise, but it also increases risks to investors. Questor thinks that investors cash would be better placed elsewhere. Sell.

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