Why Petrofac could be an interesting play on the oil price

I’m optimistic about the prospects for the Petrofac Limited (LON:PFC) (PFC.L) share price

Petrofac Limited
Petrofac Limited

I’ve been bullish on oil for years. BP plc (LON:BP) (BP.L) and Royal Dutch Shell Plc (LON:RDSB) (RDSB.L) have been stalwarts of my portfolio for a long time, and at least with my relatively recent purchases of BP and Shell I am in profit.

However, there may be another way to benefit from the long term rise in oil. Petrofac Limited (LON:PFC) (PFC.L) is essentially an oil services company which provides a range of services to oil & gas producers across the globe.

I’ve analysed Petrofac and think it may present a buying opportunity at the moment. On two key metrics, it scores very well in both areas in my opinion. The Petrofac PE is 9.67 and the dividend yield for this company is 7.46%

Why does it have a relatively low valuation and relatively high dividend yield? Fairly recently, Petrofac announced that it was under investigation by the Serious Fraud Office. On Friday 12 May, the Petrofac share price dropped from around 830p to around 700p as a result. At the time of writing it is trading at just 684.5p.

Being investigated by the Serious Fraud Office may present a risk to Petrofac’s investors.  However, I believe that the risks facing the company from both the Serious Fraud Office investigation and from the potential for a lower oil price may already be factored in to the Petrofac share price.

Therefore, while I feel it is a relatively risky share to own, I believe the potential rewards on offer could also be relatively high.  The Petrofac share price was trading at around 1750p five years ago, now it is valued at almost a third of that. I believe that oil prices could rise over time, with demand from emerging economies such as China and India potentially helping to reduce the supply surplus which has been a feature of the oil market in recent years.

About Mark Howitt 121 Articles
Mark Howitt is a long-term buy-and-hold investor who has been buying and selling shares for a number of years. He is particularly interested in the banking, energy and telecoms sectors, but also holds stocks in a variety of other industries.