The £5b Oil Opportunity You've Probably Never Heard Of

Published in Company Comment on 9 September 2011

This FTSE 100 share plans to double its profits by 2015.

Are you looking for an oil play to add to your portfolio? You may have considered BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB), but might prefer something with a bit more growth potential than those slow-moving giants.

Perhaps you have pondered over some small-cap oils, many of which certainly hold the promise of rapid growth, but have been put off by the inherent risks of such outfits.

Well, as a play in the middle-ground, I would put forward the case for Petrofac (LSE: PFC), which provides various engineering and construction services within the oil and gas industry.

A track record of growth

You may not even have heard of Petrofac, but it is a big player in the resources industry and, with a market cap of £4.8 billion, is a constituent of the FTSE 100. The group operates worldwide, with a focus on the North Sea, the Middle East, Africa, Russia and Asia-Pacific.

Petrofac has already seen rapid growth. It was founded in 1981 with just 25 staff members and a key milestone -- and major success -- was the award of the $1 billion Ohanet gas project by Woodside in 2000.

But even in 2002, Petrofac had only 900 employees. By then, however, the group started to acquire other oil-services companies to fuel rapid expansion. The company now has 14,600 employees.

With its aggressive acquisition policy, Petrofac has today built up an enviable portfolio of services available globally to the oil and gas sector. The firm's wide-reach continues to attract further contracts and sustain growth.

Indeed, Petrofac's growth rate in the past few years has been particularly impressive, with revenue increasing by 133% to $4.3 billion and profits by 364% to $558 million between 2006 and 2010. The shares, at the current price of 1385p, trade on a P/E ratio of 15, which to me seems very reasonable for a company expanding at such a pace.

And a plan for future growth

The big question is, of course, will the business continue to grow into the future? Well, Petrofac is confident that it will, saying it is on course to more than double its 2010 earnings by 2015. That implies compound year-on-year profit growth of 15%.

It's an ambitious target and, if it can be met, the shares would be undoubtedly look cheap, having fallen from their highs of around 1600p, reached in January this year.

Petrofac's chief exec, Ayman Asfari, claims the company will expand firstly by extending its capabilities, broadening from just engineering and construction to operations management, training and consulting; and secondly, by expanding into new countries. The company plans to invest £2.4 billion during the next few years to secure contracts in Indonesia, Malaysia, Nigeria and Thailand.

There may be more acquisitions, but there should also be organic growth, with the business planning to recruit thousands of more staff.

But what are the risks?

What about the bear case? Well, the developed world seems to have entered a phase of almost zero growth. If things become worse and we enter another recession, the oil price could collapse just as it did during 2008, and contracts for Petrofac could start to dry up. In addition, few large companies can sustain levels of superior growth for too long. At some point, Petrofac's rate of expansion will become somewhat more subdued, which may keep a lid on the shares.

Definitely worth looking at

On balance, though, my view is that we will have a sustained period of sluggish economic growth rather than a second deep recession. I expect the oil price to remain high, which in turn should encourage oil companies to increase their capital expenditure -- to the benefit of services companies such as Petrofac.

Even though Petrofac has seen its share price rocket in recent years -- it is now five times what it was five years ago! -- I'm sure there's scope for yet more gains. I'm convinced the share is definitely worth looking at as a lower-risk growth play in the oil sector.

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BLB53 09 Sep 2011 , 9:23am

This has done well for me since 2008 and definitely a long term hold. Asfari is a very shrewd operator and as long as he remains in charge I feel PFC has a lot further to go. As well as growth, it is also worth a look for 'jam tomorrow' income - yield increased at over 25% pa over past 5 years.
Good value at current prices.

QuantumDealer 09 Sep 2011 , 9:38am

I agree with BLB53. However, I recall hearing that Asfari was due to retire (or certainly considering it). I think he feels he has taken the business through the establishment of its rapid growth phase and now needs someone to manage the growth and take advantage of the opportunities which present itself to PFC as a viable option for oil & gas service contracts. Dividends are growing fast as pointed out above which is a very healthy sign of shareholder awareness. Recent contract wins have also highlighted the validity of this firm as a major player in this arena. However, the article is about a month late as the share price is now back up at £13.50-14.00, and had been as low as £11 within the past 30-40 days. It is still a strong buy in my book given the aggressive growth strategy by the firm. The recent Mexico contract win, the first from the Govt. of Mexico since they opted to 'open-up' their oil & gas fields to external firms, is a great sign of PFC's competitiveness on a global stage. BUY.

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