Stock Purchase: Petrofac

I’ve now maxed out my NISA contribution for the year, so this investment was made in my Taxable account. I opened an account with iWeb last year, and I’ve been very impressed with them so far. They have minimal broker fees (£5 + Stamp Duty), and their share information and service isn’t too far away from my current Broker H&L. So much so, that in the new Tax year, I’ll be opening a NISA with iWeb and staying with them for the forseeable future. I’m not planning on changing my H&L NISA over to iWeb, due to the large transfer fees (£25 per holding). 

On Friday 23rd January 2015, I bought 142 shares in the FTSE 250 Oil and Gas Services & Distribution company PetrofacThe share price at the time of purchase was 680.78p per share. The total cost with charges included was £966.72

The average yield over the last 5 years has been below the threshold I usually invest in (similar to Rio Tinto) – 2.6% . The oil and energy sectors have experienced significant losses in share price over the last few months and Petrofac is very much part of that club. Their 52 week high was 1,483p per share, which is 54% higher than it was at the time of purchase. Their recent slump saw prices as low as 594p a couple of weeks ago. The last time the share price was down at these levels was back in May 2009. 

The share price tripled in less than three years (May 09 to Apr 12). It peaked in April 2012 at 1,772p per share. The price then continued to decrease down to it’s current level. The drop in share price from top to bottom is almost 66.5%. Ouch! You can find great opportunities in such drops and that’s exactly as I view it now. Petrofac’s yield has increased significantly to 5.97% on today’s prices. There is of course the possibility that the dividend might be cut or reduced, but at it’s currently level it could still be maintained, especially if there is further growth between now and when the companies Final Results are released on 25th February 2015 and the Final Ex-Dividend date in April 2015. 

The companies P/E Ratio is currently at 5.35. It’s worth noting that the P/E ratio was 13.10 at the end of 2012, and 9.60 at the end of 2013. I usually look for companies with a P/E ratio below 20. 


The dividend payment has increased every year it’s been on the stock market, which dates back to 2004. Over the last 5 years the average dividend growth rate was 21.6%. The most recent increase was 2.81%

Their average dividend cover has been a very consistent 2.91 over the last 5 years, and for the previous financial year, the dividends were covered by 2.9

I’ve been watching Petrofac for just over 6 months now as their share price was dropping. I was close to making a move when their price went below the 1,000p mark. Thankfully, I didn’t have any spare capital at this point. Their price shot up to 1,200p and then it slumped to 594p a few months later with the oil price drop. I was unsure about Petrofac at that point. I’ve been stung by Tesco and I didn’t want to jump on a dead duck. 

Earlier this week, the company announced that they had won a $4bn contract for Kuwait’s state oil company. The news was followed by a 11% hike in share price in a few days. This was exactly what I was waiting for. Some confidence. 

Petrofac may struggle to continue paying out an increasing dividend for 2015, but it now has a foundation to build on again. If the share price rises to a level it did back in 2012, I could see capital growth of nearly three times of my initial investment. I’m hoping that I’ll benefit from stable increasing dividends from 2015 moving forward, like they demonstrated between 2004 and 2014. A big part of my decision was based on benefiting from capital growth.  


What do you think of Petrofac? Or is this industry still too risky to invest in? Are you happy with your NISA Provider?

0 Comments

  • Anonymous

    Reply Reply 25th January 2015

    Huw

    I have had Petrofac in my watclist for some time as well. Of late I have invested quite heavily in the Oil industry and felt that Petrofac for me would be a bridge too far and make me far too overweight in that sector.

    As far as NISA providers are concerned I am with HL and my wife is with Best Invest. Over the Christmas break I did a study of the different brokers and shortlisted HL and iWeb as the ones we would most likely go with in the next financial year. We only have a few years left till we reach FI and as such the important factor for us is the annual management charges. Both HL & iWeb are 0% for stocks. I take advantage of HL's monthly savings which only charges £1.50 per trade. The down side of this is that you can only buy on the 10th of the month. I recently contacted HL about this and they are planning on adding some alternative dates. iWeb are £5 per trade but don't offer a reduced rate monthly saving plan. They are part of the Halifax group so have plenty of financial backing.

    I will reassess the different brokers again closer to the date, however, at present we will most likely go with both HL & iWeb.

    Richard

  • Hi Huw

    The Oil Equipment, Services and Equipment sector has certainly taken a beating in recent times. Both PFC and AMFW are now getting plenty of attention from me as they are near the top of my watch list. Interesting that you pulled the trigger on PFC as I'm more interested in AMFW. One of the reasons I don't like PFC is that for the last 2 years they have been unable to generate a positive operating cashflow which is one of my key criteria.

    Did you look at AMFW? If yes, would be interested why you went for PFC over them.

    Cheers
    RIT

  • Huw Davies

    Reply Reply 25th January 2015

    Hi RIT,

    AMFW were on my watchlist too funny enough. My decision was down to a few things in the end.
    -Petrofac's profit after tax increased every from 2004 up until 2013. 2014 was the first year they went backwards.
    -Petrofac's P/E has been consistently lower than AMFW over the last 10 years too, suggesting to me that they offer slightly better value. AMFW's P/E ratio has stayed very consist over the last 3 years in particular, and if you take the last 12 months, their share price has dropped 20% but their P/E has increased.
    -Petrofac's dividend is currently higher. Although both companies are yet to cut their dividends in over 10 years.
    -Petrofac have had higher high's, and they're currently having a lower low. I feel right now there's a better chance of benefiting from capital gains. Looking back over the last 10 years, Petrofac have shown more consistent growth in – earnings per share, and revenue after tax in comparison to AMFW. This instills some confidence to me that they can work their way back. Especially now that they won the contract in Kuwait.

    I think both companies offer great potential right now, but Petrofac stood out to me based on the criteria I'm looking for. I fully appreciate that I'm taking a risk with them too.

    Thanks for stopping by and good luck with your decision making.

    All the best
    Huw

  • Huw Davies

    Reply Reply 25th January 2015

    Hi Richard,

    I completely respect that. I've taken a punt with Petrofac. It certainly isn't a sure thing. They offer a lot of potential and I'm prepared to ride it out for 5+ years to get the best from them. I don't have an investment in the Oil Equipment, Sevices & Distribution sector, and I think for now, this will be my only one.

    I have been very with H&L until I started looking around for other providers. The share dealing charges are very high in comparison to other companies. I'm just starting out on my FI journey, so I'm going to be buying a lot more shares. £11.95 down to £5, will make a big difference over time for me.
    I like H&L's option to have a monthly saving plan, but personally I like the control of purchasing shares when I want to buy them and I work in sales so my monthly wage fluctuates a lot. Some month's I might not invest, then in other months I might buy two to three shares.
    On the plus, I think H&L's website is fantastic. I love the layout and they have a lot of useful information on offer. iWeb, share most of the same information, but I don't think it's as easy on the eye.

    Congratulations on getting closer to FI. It must be one hell of a feeling to be approaching it!

    All the very best
    Huw

  • Tawcan

    Reply Reply 26th January 2015

    The oil equipment and services sector has been taking a beating lately. I've been looking at Ensign Energy Services Inc. but not 100% if I want to invest in this company at this time.

  • UK Value Investor

    Reply Reply 26th January 2015

    Hi Huw, I've had Petrofac in my portfolio a while so the recent declines have been a good test of my "don't panic" stance. One thing I would say is that the recent negative free cash flows are not necessarily a bad thing (although they might be, of course).

    I think a lot of investors get too obsessed with companies always having positive free cash flows. It's important to remember that free cash flow is operating cash flow minus capex, so a good free cash flow might just be a lack of sufficient capex to sustain future growth or even just maintain current earnings capacity.

    As the latest Petrofac annual report says:

    "As we complete our offshore investment programme, and IES (Integrated Energy Services) becomes cash generative, we also expect the Group as a whole to return to free cash flow generation."

    So it's not that the company "wasn't able" to generate free cash in the last few years, it was all part of the plan for expansion.

    John

  • Huw Davies

    Reply Reply 26th January 2015

    Hi Tawcan,

    Thank you for stopping by. I have to confess to not hearing of the company you mention. What's preventing you form making the investment? Is due to risk or do you have more appealing options?

    All the best!
    Huw

  • Huw Davies

    Reply Reply 26th January 2015

    Hi John,

    I'm intrigued with when you purchased them. I hope it wasn't when they were at their peak back in 2012.

    Well summarised John! I could not have put it clearer myself.

    Petrofac carry risk of course, but there is a lot to feel optimistic about, especially for myself coming in now at this stage. They have a consistent, reliable history back to 2004. This doesn't mean the future will continue in that way, but it's a good indicator, and that gives me some confidence.

    I feel confident that in a 5 year period (at least) I will do well out of this company.

    Thanks again for stopping by and sharing your thoughts.

    Huw

  • UK Value Investor

    Reply Reply 27th January 2015

    Hi Huw, I only bought it a few months ago, although just before the really serious declines began (drat!). But such is life. It looked cheap when I bought it and it looks even cheaper now. It will be interesting to see how it is affected by these oil price declines and either way we'll profit, either financially or educationally (which should lead to eventual financial gains in the future).

  • Huw Davies

    Reply Reply 28th January 2015

    Hi John,

    I was close to moving on this company when they went below 1000p, which I think was in early October. If I had the capital at the time I would have invested in them.

    I really admire your mindset John. I try to look at investing the same way, although it's difficult at times. I suffered/benefited from the same fate with Tesco when in invested in them last spring. Things have started to pick up there and I'm learning all the way.

    All the best
    Huw

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