The Petrofac (LSE: LON:PFC) share price performance has been disappointing in recent weeks. It has dropped by over 20% since early October, with a weaker oil price outlook a contributing factor. A lower oil price could mean reduced profitability for the oil and gas sector, which may mean that activity levels are lower. As such, the financial prospects for the business may deteriorate to some degree.
Of course, the fall in the company’s valuation has not been as stark as that of Bitcoin. It has slumped by around 80% in the last year. Could Petrofac, alongside a smaller industry peer which released results on Monday, offer better recovery potential than the virtual currency? Or, is bitcoin a better investment during what is an uncertain period?
Improving prospects The small-cap in question is SDX Energy (LSE: SDX). It’s a North Africa-focused oil and gas company, with its third quarter update showing financial improvement versus the comparable period from the previous year. Net revenues increased by 50%, with a strong operational performance delivered across its North African portfolio.
In Egypt, it was able to successfully complete a seven-well workover programme at North West Gemsa, with its production expected to be in line with guidance. It has also successfully completed the 240 square kilometre 3D acquisition programme in the Gharb Centre permit. Its cost is due to be in line with expectations, with the company continuing to see growth opportunities across its portfolio.
Looking ahead, SDX Energy is expected to post improving profitability in the next couple of years so it has a forward price-to-earnings (P/E) ratio of around 2, using 2019’s net profit forecast. Therefore, while potentially risky, it may offer recovery potential, following a 40% share price fall in the last six months.
Low valuation Petrofac’s recovery potential also seems to be sound. The company has been able to improve its operational performance in recent quarters, reporting progress at a time when oil prices were buoyant. Now that they’ve fallen heavily in a matter of weeks, investors have become increasingly unsure about the prospects for the business. However, this could prove to be a buying opportunity, in my opinion, since the stock has a relatively low valuation, even in an industry where margins of safety are somewhat wide at the present time.
For example, Petrofac has a P/E ratio of 7.8, using next year’s forecast earnings. With its bottom line due to fall in the current year, and next year, it appears as though investors have factored in its financial prospects, at least to some degree. This could create an opportunity for investors, while a dividend yield of 5.8% from a payout that’s covered 2.4 times by profit, indicates that the total return on offer could be high.
Given that Bitcoin continues to lack real-world appeal, in terms of its size and lack of infrastructure, I believe Petrofac and other oil and gas shares may provide greater recovery potential. While risks are high, they seem to offer stronger fundamentals than the virtual currency.
Peter Stephens owns shares of Petrofac. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.