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.

Investment Highlights - Petrofac Ltd – Hold at GBX 135.00

• As per valuation metrics, EV/Sales, and Price/Earnings multiples of the Petrofac Ltd are currently lower as compared to the corresponding multiples of the Oil & Gas Related Equipment and Services industry. It reflects, shares are undervalued as compared to the industry.
• On the liquidity front, Petrofac Ltd’s current ratio was higher than the industry median of 1.23x, reflecting sufficient liquidity to meet short-term obligations and to tackle the impact of coronavirus. The liquidity position is continuously increasing since FY2017.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 28 level), 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 US$125 million and up to US$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 US$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 US$1.0 billion. As of 30 June 2020, the Company had net debt of US$29 million.

One Year Share Price Chart

Daily Chart as of 11 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

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 133.00 and GBX 460.30, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for Petrofac Ltd at the current price of GBX 135.00 (as on 11 September 2020, before the market close at 9:05 AM GMT+1) and will recommend fresh buying at the right time.

Premier Oil Plc

Premier Oil Plc (LON: PMO) is an FTSE All-Share London, United Kingdom-based multinational Oil & Gas Exploration, and Production Company.

Investment Highlights - Premier Oil Plc – Hold at GBX 18.33

• As per valuation metrics, EV/Sales, and EV/EBITDA multiples of the Premier Oil Plc are currently lower as compared to the corresponding multiples of the Oil & Gas industry. It reflects, shares are undervalued as compared to the industry.
• In the last six months, the Company delivered a decent return of 16.93% and delivered significantly higher returns compared to the benchmark Index (FTSE-all Share Index).
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 18 level), which means the stock price could increase in the short term.

Risk Assessments

• The decline in oil prices can impact the cash generation and profitability of the Company.
• The Company can face liquidity risk with insufficient borrowing facilities amid Covid-19 crisis.

Recent News

On 3 September 2020, Premier Oil announced it had been awarded 2 licences in Southern Gas Basin and 1 license in Central North Sea in UK's 32^nd Offshore Licensing Round.

Financial & Operational Highlights – H1 FY2020 (30 June 2020)

• Despite the commodity price collapse, the Company generated a decent operating cash flow of US$324 million along with free cash flow if US$25 million and reduced net debt to US$1.97 billion.
• Production averaged 67.3 kboepd in H1 FY2020, due to an unplanned 20-day shutdown on Catcher, and the cessation of production from Huntington and Kyle.
• At the current forward curve, the Company projects to be free cash flow positive in FY2020.
• The Company has a strong liquidity position as on 30 June 2020, with cash resources of US$139.7 million and undrawn facilities of US$329.3 million.

One Year Share Price Chart

Daily Chart as of 11 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance declined, with negative profitability margins. At present, the Company is focussed on completing the proposed acquisition of BP’s assets and refinancing of debt facilities.

The proposed transactions will help Premier Oil in normalise balance sheet and allow it to benefit for additional FCF (free cash flow) generation and reduce debt. Moreover, with rising near-term production, PMO should be able to reinvest in growth projects to deliver value for shareholders. The stock made a 52-week low and high of GBX 10.02 and GBX 120.70, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for Premier Oil Plc at the current price of GBX 18.33 (as on 11 September 2020, before the market close at 9:20 AM GMT+1) and will recommend fresh buying at the right time.

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

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