Today's 28% Fall in PFC (7th Feb '19)

Thursday, Feb 07 2019 by
3

Today's fall is overdone in my opinion.

Before the allegations, PFC were trading at around £8.50 and, after today's news, we are at £4.00. That's £4.50 per share destroyed due to the SFO investigation (oils overall are now trading higher than April/May 2017). With 346 million shares, that equates to £1.56 billion of shareholder value destroyed by the investigation.


Assuming that PFC is held culpable for the contract bribery allegations admitted by the ex-worldwide head of sales, and assuming that a agreement is reached with the SFO, then a fine rather than a trial would result (which might explain why no-one else has been charged at this point).


Precedent suggests that the fine could be based on the profit made by PFC on the relevant contracts. Based on press releases today, the relevant contracts sum to total revenues of around $4.45 billion. PFC's historical operating margin is around 10% (less in recent years). Assuming that PFC made 10% on all of these contract revenues would give an operating profit of around $445 million.


In bribery cases, the fines are 'usually' in the range of 250%-400% of the profits made (depending on a number of factors, including the extent of cooperation with the investigation, procedures in place etc.). Assuming an aggressive penalty of 350%, would give a fine of around $1.56 billion (or £1.2 billion).

A hit of £1.2 billion rather than the £1.56 billion PFC has already taken would put the share price at around £5.08...rather than £4.00. On top of that, PFC's operational performance has been excellent over the past 6 months, the oils in general are higher...and the CEO made a significant share purchase.


Unless there is more news to come, which is unlikely as the individual concerned was the worldwide head of sales and would have been aware of activity on all contracts, then PFC should be trading in the 510p to 550p range today...25-35% upside potential.


Obviously, just a thought, not a recommendation, DYOR

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5 Posts on this Thread show/hide all

extrader 7th Feb 1 of 5
1

Hi wayne_d_roberts,

I may be misunderstanding something, but I'm not sure that a reduction in PFC's MCap because the market has taken fright and assigned a lower value to the Co' future earnings stream can be directly compared with the potential issue of having to stump up the equivalent in hard cash in a much shorter time frame.

PFC hasn't 'taken a hit' so far,  its shareholders have. That will change if/when PFC is fined....and pays up.

ATB

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Edward John Canham 7th Feb 2 of 5
1

I think you confuse market value based on profit multiples, with an actual bill / fine / liability.

Petrofac (LON:PFC) could not survive a £1.2bn fine looking at its balance sheet - it already has net debt of £1 bn.

Phil


Edit - crossed with above

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aflash 7th Feb 3 of 5
1

Tough question from the Technical Analysis point of view.

It bottomed today around 392p then rose above 400p and closed around 395.

There was a rising trend line of Higher Lows from the June 2017 Bottom through the Feb 2018 Low to the Dec one. 

Support could be found between 481 and 447. 

That has been blown away and will now be Resistance.

I bought in May and August 2017 and sold 23 January 2018. Not the best timing but still profitable.

It was hard not to buy today but in May 2017 it kept going down until June.

15 795 003 shares changed hands today compared to an average of 1 492 291.
How many more sellers are out there?
There is no short interest.

This may be the bottom but reading other posters suggests not.
I have a limit order in at 343p.

The June 7 2017 Close was 349p. It may bounce tomorrow only to settle lower in time. 

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willhampson 7th Feb 4 of 5
1

Interesting article, thank you. I wish you and other holders well. For me, it is a complete bargepole now that an SFO action has been successful against a former employee of the company (albeit seemingly through a confession rather than a trial). Though the RNS is presented almost in a positive sense as no charges have been brought it goes on to state that "... a number of Petrofac individuals and entities are alleged to have acted together with the individual concerned." Thus, the investigation seemingly continues into PFC. I very much doubt the SFO will rest there; they need big-ticket convictions to justify their existence. Complete avoid for me, but good luck with whatever you decide! Will

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aflash 8th Feb 5 of 5
1

Correction: there is shorrt interest of 5%.
They will be waiting on developments in the court prosecutions and closing on lurches downwards.

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