Why I imagine beleaguered penny inventory Petrofac is price holding on to

Having been relegated from a FTSE 250 dividend-paying firm to a troubled penny inventory, vitality providers agency Petrofac’s (LSE: PFC) fall from grace could also be full. However I imagine a turnaround beckons.

When its protracted bribery case lastly reached a conclusion in 2021 and the Covid pandemic receded, traders hoped Petrofac could lastly start to rebuild its repute. As a substitute, inefficiencies throughout the corporate’s worth chain — starting from value overruns to fee delays — made issues worse.

As considerations surfaced over its stability sheet this 12 months, Petrofac’s share worth briefly slumped beneath 9p in April. Following a delay within the publication of outcomes and a brief share suspension, it resumed buying and selling at sub-15p ranges in June and has largely stayed there.

That’s after its greatest enterprise unit – engineering & building – posted an incremental lack of about $190m for the 12 months, and full-year losses widened to $505m from $320m within the earlier 12 months.

Issues would possibly simply get higher

Heading for the exit will not be a smart thought for me proper now, nevertheless, as a result of issues may get higher. Petrofac’s future initiatives e book stays robust, and it has introduced an aggressive turnaround plan predicated on restructuring.

It has reached near-term agreements with chosen holders of its matured debt to “not take any motion” throughout which period it’s working furiously to get its act so as. That’s the place Petrofac’s undertaking e book comes into sharp focus.

It claims to have a powerful order consumption of $7.1bn, driving vital backlog development to $8.1bn. Alongside new offers in conventional vitality, Petrofac has additionally posted a sequence of contract wins within the renewable vitality section.

The place from right here?

Having spectacularly slumped from a dependable dividend inventory to a excessive threat/reward penny inventory, the professionals of holding on to (or shopping for extra) Petrofac shares, nevertheless robust, carry baggage.

Firstly, powerful negotiations with its collectors, which is able to possible embody substituting debt for fairness, could dilute Petrofac’s worth additional for traders within the near-term. However returns could ultimately comply with for these taking part in the lengthy sport.

Secondly, virtually each service undertaking Petrofac is embarking on can be pegged to performance-guarantee necessities from shoppers. That may solely be factor, for my part. It’s one thing an organization in survival mode can’t afford to disregard, however there’s no assure that it’s going to.

Thirdly, having been given a lifeline by collectors, Petrofac is dashing up the sale of its “non-core” property. Whereas good, additional readability is required past its Thai Oil clear fuels undertaking retreat.

Fourthly, at rock-bottom costs, a suitor could but emerge to carry Petrofac’s share worth. Or perhaps not: simply ask Wooden Group, whose well-advanced takeover talks with Sidara collapsed not too long ago owing to “market situations.”

General, issues are finely poised for Petrofac. Opinion is split amongst analysts primarily based on the result of the 4 components I flag, with warning being expressed by brokers like JPMorgan and Berenberg.

My common holding worth is just under 60p. It’s a stage at which I’ve a lot to lose by promoting Petrofac at present costs. A debt-to-equity conversion could also be on the playing cards, carrying dilution dangers for present shareholders like me. Nevertheless it’s a threat I’m keen to abdomen with a longer-term view.