Head To Head: Petrofac vs Amec

Published in Investing on 21 September 2012

Which blue-chip oil services company should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are blue-chip oil and gas services companies Petrofac (LSE: PFC) and Amec (LSE: AMEC).

In recent months, the market has become a little more sanguine about slowing growth in China and the global economic climate. Shares of companies in the natural resources sector and businesses connected with it, such as oil and gas services companies, have rallied of late.

Petrofac and Amec are high-beta stocks, which means they rise faster than the market when the market is rising and fall further than the market when the market is falling. The FTSE 100 index has risen 6% over the last three months. Petrofac and Amec have risen much further -- 11% and 12% respectively.

Let's take our seats at ringside.

Round 1: earnings

 PetrofacAmec
Recent share price1,613p1,143p
Last year price-to-earnings (P/E) ratio16.018.5
Current year forecast P/E13.714.3
Four-year average earnings per share (eps) growth (%)4223
Current year forecast eps growth (%)1629
Forecast operating margin (%)138

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Petrofac wins the first round comfortably, taking all the points with the exception of the point for forecast eps growth.

Both companies' pace of earnings growth -- over a sustained period -- is striking for members of the FTSE 100. However, while Amec has been in the Footsie for a while, Petrofac is a recent graduate from the mid-cap index, having been promoted in 2009.

Round 2: dividends

 PetrofacAmec
Last year dividend yield (%)2.12.7
Current year forecast dividend yield (%)2.53.1
Four-year average dividend growth (%)4124
Current year forecast dividend growth (%)1717
Forecast dividend cover2.92.3

Sources: Digital Look, Morningstar, company reports. Winners in bold.

It's all square in the second round. Amec scores points for historic and forecast dividend yield and Petrofac for historic dividend growth. The companies share the point for forecast dividend growth, but Petrofac's prospective dividend is better covered.

As you'd expect with more 'growthy' companies, this pair's yields are below the FTSE 100 average, while dividend cover is higher than average. In other words, Petrofac and Amec are ploughing back a relatively high proportion of their earnings into their businesses.

Round 3: balance sheet

 PetrofacAmec
Price-to-book (P/B) ratio8.12.6
Net gearing (%)-134-36

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Again, the companies share the points in the final round. It's worth noting that both companies have strong balance sheets, the negative gearing figures indicating net cash in the books.

Petrofac takes the contest by a good margin, the victory being founded on its comfortable win in the first round and matching Amec in rounds two and three. The over points tally is: Petrofac 7.5 and Amec 4.5.

Post-match assessment

On the face of it, neither company's P/E rating screams "bargain". Having said that, it's very arguable that their tremendous earnings growth merits a higher P/E than the average FTSE 100 company. As these are firms with a growth profile, I'd give a little more weight to Petrofac's lower P/E than to Amec's higher dividend yield.

However, as I mentioned earlier, the Footsie has been buoyant of late and Petrofac's and Amec's shares have risen strongly over the last few months. As a pull-back in the market typically exaggerates the downward share-price movement of high beta stocks, I generally find it more comfortable to invest after a fall in the market than after a market rally.

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Further investment opportunities:

> G A Chester does not own shares in any of the companies mentioned in this article.

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Comments

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desima 21 Sep 2012 , 4:44pm

Amec has been a ftse100 share for a while, it is Wood Group which has been promoted this month.

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