Is Petrofac a bargain or a value trap?

Mining and energy companies have had several significant successes recently, including Energean (ENOG) its mature oil and gas fields in the Mediterranean for almost $1 billion (£790 million) to Hochschild Mining (HOC) Construction of a new gold mine just in time to profit from the record prices for the precious metal.

However, several companies on the brink of collapse stress that investors must be cautious in their search for quality. Specialist in energy services and construction Petrofac (PFC) is currently working on a major refinancing and restructuring program after being overwhelmed by maturing debts and the need to provide cash before starting major projects. Given its importance in the oil and gas and renewable energy sectors, the company is certainly still salvageable – even if it has been kept under control in recent years due to its past corruption problems.

This type of refinancing is not uncommon. Petra Diamonds (PDL) sold most of its equity to creditors in 2021, leaving previous investors with only 9 percent of the company. A weak diamond market and operational difficulties meant that the subsequent recovery was not spectacular, but it shows that there is a future after these deals.

One warning sign for those who have recently re-entered Petra is that the 2026 bonds issued as part of the refinancing have dropped in value, from 80¢ on the dollar in April to 73¢ this month. The company has said it will need to refinance the bonds before they mature in March 2025, which will be a test of bond investors’ confidence in the company (for comparison, the value of Petrofac’s bonds has fallen from 80¢ a year ago to 23¢ this month). A Petra investor day on Thursday, June 27, after this article goes to press, may provide more clarity.

The lesson from Petra is that even when a restructuring is successful, there can be repercussions later. The diamond miner also had the advantage of dealing only with creditors. Due to the nature of its business, Petrofac also needs to get customers on board.

A company spokesman declined to say whether Petrofac had missed a June 16 deadline to lodge a performance bond that would secure a major contract. “A failure to do so … would have an adverse impact on the group’s liquidity and the group’s ability to continue its financial restructuring,” the company said on May 31. It is already behind on other payments and creditors could take legal action at any time.

What Petra and Petrofac have in common is that they have serious assets. A promising mining company that hit a skid this month, Nevada Copper (CA:NCU)failed to bring its mine online despite raising nearly $40 million from existing shareholders last year. It restarted the Pumpkin Hollow copper project in late 2023 but ran out of cash after operational issues limited production.

On the microcap side: A company with a former market capitalization of £100 million Tirupati Graphite (TRR) is trying to raise money to bring its mine in Madagascar to full capacity.

An unwise decision to list the company on the stock exchange rather than Aim has limited the company’s ability to raise capital in recent years, and most directors announced their resignations earlier this year due to governance issues and poor performance. New chairman Michael Lynch-Bell is a serious mining entrepreneur who did the same work for Kaz Minerals, but he faces the challenge of convincing investors that the company is worth saving.

Many investors will be reasonably confident about how to get out of bad situations. In the worst case scenario, the fall is still far: Petrofac’s share price fell from 74 pence in June 2023 to 17 pence in December. Similarly, Tirupati has fallen from 32 pence to 5 pence.

But what about getting back in? In a major restructuring, shareholders are usually at the mercy of those who held the debt. We’d suggest looking for an unencumbered competitor instead.