The Petrofac [PFC.L] share price has been volatile in 2022. Commodity prices boomed in the first half of the year as supply fears, a low interest rate environment and a rebound in economic growth created a perfect storm that some described as a commodities ‘super-cycle’.
Yet, with prices for commodities now dropping, so has Petrofac’s stock. Declining revenues haven’t helped, but will interim results due out this week offer some hope to investors?
Why investors should care about Petrofac’s share price
Petrofac builds the necessary infrastructure for gas and oil production, among other commodities. Its main markets are the Middle East, North Africa and the UK North Sea, although it is looking to expand into Asia, India, the US and Europe.
At the start of the year it looked like the company would benefit from a commodities ‘super cycle’. That hasn’t quite come to pass as energy, metal and agriculture prices tumbled due to inflationary pressures and falling demand in the second half of the year.
Commodities benchmark the S&P GCRI has seen a downward trend since early June, as has the iShares Global Energy ETF [IXC] and the Vanguard Energy Index Fund [VDE].
Petrofac’s share price has experienced a similar level of decline, having sunk more than 26% since 24 May. That marks a turnaround in a stock that had rallied at the start of the year to almost touch 160p a share in late May.
But it hasn’t been all bad news. Over the past month Petrofac’s stock has gained 11.9% as the stock piggybacked on strong earnings results from other energy companies. On Friday 5 August the stock climbed 2.8% to close the week at 116.1p. A strong set of interim numbers from Petrofac could help sustain investor enthusiasm.
Petrofac revenue hit by Covid-19
In the medium term, Petrofac is targeting group revenues of between $4bn and $5bn, with around $1bn coming from new energy.
In 2021, Petrofac’s revenue came in at £3.1bn, down 25% year-over-year. Net profit was $35m, down 50% year-over-year. Blame was placed on the continuing disruption caused by the Covid-19 pandemic, which has delayed project schedules and ramped up costs.
Petrofac’s engineering and construction business reported $2bn, a 36% drop year-over-year, while profits also slid to $8m. Order backlog also decreased in this area. Integrated energy services revenue fell 55% due to the disposal of interests in Mexico, yet like-for-like revenue was up.
For the full year Petrofac predicted an overall decline in group revenue. Tailwinds cited by the company are cash collected from disinvestments, working capital and oil prices. Headwinds included a £106m fine from the Serious Fraud Office and lower margins from the company’s current backlog.
What to look out for in Petrofac’s interim results
A trading statement at the end of June already provided some clues as to what investors can expect in this week’s results.
Petrofac’s engineering and construction business continued to be affected by “the lingering impact of the pandemic”. First half revenues here are expected to come in at $600m, “reflecting lower levels of activity”. Petrofac said it expects to see a strong order intake in the second half and to deliver backlog growth year on year. Asset solutions is expected to see revenues of $500m in the first half of the year, with Petrofac saying it expects this to rise in the second half of 2022.
Look out for more insight on operations in North Africa. In August Petrofac announced that it had secured a provisional $300m engineering, procurement and construction contract for the Tinrhert Development Project in Algeria, along with its consortium partner Génie Civil et Bâtiment. Another area to watch is Petrofac’s expansion into sustainable energy sources, including offshore wind and hydrogen.
If Petrofac can show that business is recovering from the impact of the pandemic and growth is likely to return in the second half of the year, then the share price could warrant further attention.
Of the eight analysts polled by Refinitiv, the median price target for Petrofac’s stock is 181.4p, suggesting a 56.3% upside on Friday’s close.
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