Petrofac debt puts it in ‘challenging financial position’

Oil and gas service provider Petrofac’s (LON:PFC) efforts to restructure its debt could lead to a significant dilution for shareholders, according to an analyst.

Last week, the company said it “remains in discussions” with its lenders, with options to exchange equity in the business.

Petrofac has been under considerable pressure in recent months to stem a collapse in its share price, which closed down 20.5% on the day of the announcement.

Hargreaves Lansdown head of equity research Derren Nathan said markets have been disappointed so far by Petrofac’s efforts to restructure the business and shore up the balance sheet.

Mr Nathan said the prospect of Petrofac having to issue shares to its lenders is a “distinct possibility”.

“Investors are rightly concerned that their ownership of the company may be significantly diluted,” he said.

“And for now there is no guarantee further funding will be secured.”

Petrofac ‘rebuilding’ order book

Mr Nathan said while Petrofac is making “solid progress” in rebuilding its order book and sales pipeline, investors are seeking a return to profits and cash flow.

“Progress on that front has so far been disappointing,” he said.

“That’s heaped pressure on Petrofac’s balance sheet. And there’s still some work to do to assure the company’s future.”

© Petrofac

With talks underway to sell off parts of Petrofac’s business and its share valuation close to an all time low, Mr Nathan said investor sentiment is likely to remain negative until more clarity emerges.

While the low Petrofac share price may appear to be a “tempting” entry point for investors, Mr Nathan said it comes with an “elevated level of risk”.

Any further disappointment would “likely cast a bigger shadow” over the company’s future, which would extend to its shares, Mr Nathan said.

Headcount a ‘key metric’ for Petrofac

To turn around the company’s misfortune, Mr Nathan said Petrofac needed to focus on winning new business, securing strong commercial terms and striking the right balance on its headcount.

“Petrofac is a relative minnow in the energy equipment and services space,” he said.

“That gives it less bandwidth to invest in hiring skilled engineers in anticipation of new business.

“Over-hire and the bottom line gets punished. Hold back and there could be problems delivering projects.”

Delivering on these measures is made more difficult by volatile oil and gas prices, Mr Nathan said.

However, he noted Petrofac has had recent success in securing work in the renewable energy space, showing the company does not have “all its eggs in one basket”.

Overall, Mr Nathan said efforts to shore up Petrofac’s finances are likely to be the “key driver” of its valuation, and he cautioned there are “no guarantees of success” on that front.