A big contract win for Petrofac (PFC) is exciting the market with the shares up 3% to 877p. The company is being awarded a $780 million project for a Kuwaiti oil pipeline – continuing the strong performance of its engineering and construction (E&C) business which is completely outshining the struggling Integrated Energy Services (IES) division.

Shares in the company have been recovery mode in recent months as the company moves towards the conclusion of the troublesome Laggan-Tormore project, the market rewards the strength on the engineering side and speculates on the possibility of disposals in the IES arm which could boost the balance sheet and prompt capital returns to shareholders.

Web - Petrofac - 10 July

Not everyone is convinced by this narrative. Investec, which reiterates a hold recommendation 835p price target, highlights a number of outstanding risks some of which are set out below:

‘Laggan-Tormore. The market reacted to the recent, modest cost overrun with a degree of relief. With the project 99% complete, the risk of further charges should be even lower. However, with operator Total (FP:PA) indicating that start-up by end-Q3 will still be a challenge, there's many a slip 'twixt cup and lip.

‘Greater Stella. Petrofac remains confident of the revised schedule (start-up in mid-2016). But it has still to negotiate the variation orders with operator Ithaca (IAE:AIM). As Technip has noted, this procedure is becoming more challenging.

‘E&C. By contrast, ECOM is going great guns, with YTD order intake of $4.7 billion. However, given the preponderance of contract wins in the more competitive MENA region, this could put downward pressure on 2016 margins.

‘Harvesting IES? A reversal of the expansionist strategy has seen IES revert to an enabler for E&C work. This calls into question almost all the IES portfolio. However, the end-2014 book value ($1.8 billion, 340p/sh) still looks a touch high, while capital extraction may prove challenging currently.’

Issue Date: 10 Jul 2015