Oil price, Genel, Petrofac And finally…

WTI $57.90 +47c, Brent $64.86 -34c, Diff -$6.96 -81c, NG $2.30 +12c

Oil price

Another day when WTI and Brent diverged, traders say that with increased sanctions on Iran comes less chance of trouble in the Gulf, me, I’m not so sure. Either way it has taken the differential to below $7 for the first time for a while although how long for is anybodies guess. With G20 starting on Friday and Opec+on Monday there are a number of opportunities to sort out tariffs and the oil price…

Genel Energy

Positive thinking from Genel who not long after announcing a dividend have started a share buy-back scheme this morning. They will buy back up to $10m in the period up to the 5th July the maximum allowed under powers granted to them at the recent AGM. The company believes that ‘the current share price does not accurately reflect the value of the company’s assets and that utilising its balance sheet to repurchase shares represents a value accretive use of cash resources’, something with which I concur.

In its announcement the company says that it has ‘material’ cash generation which more than funds its significant growth opportunities and its long term growth potential. This in effect means that even after this modest buy-back the company will still have more than enough firepower to add to the portfolio which is already a strong one. I like this move as it demonstrates significant faith in the increasing production growth from the existing portfolio whilst keeping the option to make complementary acquisitions. It also shows that management are aligned with investors and have added the buy-back option to their armoury to add to the dividend element which should provide capital growth as well as income. The current share price is way too low and this move should help change that and proves that management is alert to shareholders requirements.

Petrofac

A slightly mixed pre-close trading update this morning from Petrofac but nothing to really upset the apple-cart. Trading is in line with previous guidance ‘reflecting solid operational performance within the business’. $1.7bn of new order intake in the period is slightly disappointing and reflects one the one side excellent client relationships and on the other ‘recent challenges in Saudi Arabia and Iraq’. These specific problems appear to be due to the SFO naming certain clients and whilst relationships remain excellent, orders may be delayed. Indeed it is worth pointing out that no orders have been lost as a result of this action.

As with last year the first half will beat the second, this is down to a combination of reasons, firstly net margins in E&C are at the lower end of the 6.5-7.5% range and with 45% of the 2H pipeline being in lower margin contracts the effect is obvious. Also it seems that some bigger contracts from the UAE and Algeria if successful will come in 2020. Outside of the Saudi Arabia/Iraq situation there are other opportunities worth around $15bn in the second half.

The company is still targeting nil net debt by the year end and with only $100m forecast at the end of June this seems eminently plausible. Overall, this is indeed a solid operational performance albeit still with the SFO monkey on its back. The shares are well off their peak and whilst they may take a while to claw back to recent highs PFC remains a very solid investment.

 

And finally…

As England take on the Aussies in a must win game (for England only) in the CWC at Lords today could the hosts and favourites be struggling to qualify?

The Magpies have sacked local hero Rafael Benitez, or just not renewed his contract, maybe he will return to Stamford Bridge….

Got £60m to spare down the back of the sofa? You could buy rugby club the Leicester Tigers who have been put on the market.

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2 comments on “Oil price, Genel, Petrofac And finally…
  1. roger johnson says:

    The rest of press seem to have a very different view on petrofac malky old boy. why is that?

    The oil services group at the centre of a fraud inquiry has said it has lost out on up to $3 billion of new work since a former executive was convicted of bribery in February.

    Petrofac said it failed to secure any of the $10 billion of contracts it had bid for in Saudi Arabia and Iraq so far this year, after some of its previous contracts in the countries were cited by the Serious Fraud Office in its investigation into David Lufkin, Petrofac’s former global head of sales.

    Petrofac would normally have expected to win about $2 billion to $3 billion of the work but said its orders were “not considered by clients” after the bidding coincided with the SFO’s announcement of Mr Lufkin’s conviction.

    • Malcy says:

      Hi Roger
      Here is a broker comment on Petrofac and is like me still quite positive, if i find a bearish one i promise i will send it!
      Malcy

      • PETROFAC (BUY, PT 553p) – Iraq oil chief says PFC bidding is suspended – effectively, old news. Reuters is reporting that the head of Iraqi state oil company has stated that Petrofac is temporarily suspended from bidding on new work. Iraq contributed just 4% to Petrofac revenues in 2018. This is technically stronger language than that used by Petrofac with its trading update three days ago (which was along the lines of – we were excluded from bids we had already submitted, but we continue to have full bidding rights on new work….) but the outcome is unchanged, i.e. Petrofac is very unlikely to win any work in either Iraq or Saudi Arabia for the foreseeable future, due to the Unaoil/SFO investigation fall out (specific clients in Iraq and Saudi were effectively named and shamed in a Feb SFO press release, potentially causing embarrassment for the parties concerned). The practical impact is limited (Petrofac continues to win new work in Europe, India, Thailand, Algeria, UAE etc etc) but the impact of the 2yr+ SFO investigation to investor sentiment is significant – the shares rallied 15% on Wed this week purely on a totally unrelated company (Technip) having reached a bribery settlement with a totally different regulator (the SEC and Brazil) the other side of the world (Brazil) – as and when the SFO finally ends this case, whether it be with zero fine of a $1bn fine, we expect the shares to perform strongly.

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