Petrofac Ltd

Petrofac Ltd (LON: PFC) is an FTSE 250 listed Company, which is engaged in the production and processing of oil and gas. It assists companies in transforming the value of their assets across the oil and gas life cycle.

The Company will release a full-year trading update on 16 December 2020.

Investment Highlights - Petrofac Ltd – Speculative Buy at GBX 111.00

• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book multiples of the Petrofac Ltd are currently lower as compared to the corresponding multiple of the Oil & Gas Related Equipment and Services industry. It reflects, shares are undervalued as compared to the industry.
• Over the past three years (FY16 – FY19), the Company’s Net profit has surged from USD 14 million in FY16 to USD 66 million in FY19, compounded at an annual growth rate (CAGR) of ~ 67.68 per cent.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 27 level – oversold zone), which means the stock price could increase in the short term.

Key Risks

• The crashed oil prices after Covid-19 crisis continues to disrupt business activity and delay project awards.
• Moreover, the uncertain economic outlook can also lead to liquidity and credit risk.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company affirmed that it is on track to deliver USD 125 million and up to USD 200 million of cost savings in FY2020 and FY2021, respectively.
• Due to steep fall in oil and gas prices after Covid-19 mayhem, trading and awards were materially impacted.  Consequently, the Company reported a net loss of USD 78 million in H1 FY2020.
• After posting the losses, the Company continues to suspend the dividend payments to conserve cash.
• The new order intake YTD (year to date) was USD 1.0 billion. As of 30 June 2020, the Company had net debt of USD 29 million.

One Year Share Price Chart

(Source: Kalkine Group, Refinitiv)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

At present, the Company is unclear about the volatility in the oil prices and duration of covid-19 will cause disruption in business activity and performance. The Company has shown early signs of improvements in the supply chain after easing in lockdown restrictions by the government. PFC is looking near-term revenue visibility through rebuilding order book and is confident in achieving a strong position post-Covid crisis. The Company has a robust balance sheet and is continuously investing in core capabilities and reducing structural costs. The stock made a 52-week low and high of GBX 106.15 and GBX 422.00, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on Petrofac Ltd at the closing price of GBX 111.00 (as on 1 October 2020) with a lower double-digit upside potential based on 7.20x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

Hunting Plc

Hunting Plc (LON: HTG) is an FTSE All-Share listed Energy Company, which provides services to upstream oil and gas entities.

Investment Highlights - Hunting Plc – Speculative Buy at GBX 123.90

• As per valuation metrics, EV/Sales and Price/Book multiples of the Hunting Plc are currently lower as compared to the corresponding multiple of the Oil & Gas Related Equipment and Services industry. It reflects, shares are undervalued as compared to the industry.
• Over the past three years (FY16 – FY19), the Company’s revenue has surged from USD 455.80 million in FY16 to USD 960.00 million in FY19, compounded at an annual growth rate (CAGR) of ~ 28.18 per cent.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 21 level – oversold zone), which means the stock price could increase in the short term.

Key Risks

• The ongoing impact of the Covid-19 pandemic continues to create a challenging and volatile trading environment.
• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.

Financial Highlights – H1 FY2020 (30 June 2020)

• In the first half of the financial year 2020, the revenue declined and generated positive EBITDA.
• The Company has a well-positioned balance sheet with a healthy cash position as on 30 June 2020, despite the extremely volatile trading conditions.
• The Board has declared a second interim dividend per share of 2.0 cents.
• Hunting has a strong product portfolio comprising hydraulic couplings, valves, stress joints, and production flow access modules.

One Year Share Price Chart

(Source: Kalkine Group, Refinitiv)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

Despite the challenging market conditions, the Company has responded well and reported a positive underlying EBITDA. The Company has a strong balance sheet, which will help in activity improvements and respond quickly to market opportunities. During H1 FY20, RTI (RTI Energy Systems) won a number of major offshore orders, while Enpro has made good order book progress. The dividend per share of 2.0 cents, shows confidence in the chosen markets and business lines. The outlook for FY20 remains uncertain. However, enquiry levels have improved with the increasing average oil price. Overall, Hunting stays in a good position to deliver shareholder value with a strong product portfolio. The stock made a 52-week low and high of GBX 121.90 and GBX 467.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Hunting at the closing price of GBX 123.90 (as on 1 October 2020), with lower double-digit upside potential based on 5.51x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

 *Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The “Speculative Buy” recommendation is valid for the current price as covered in the report as on 2 October 2020.

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