Hedge funds have turned on Petrofac and made it the most-shorted stock on the London Stock Exchange in a matter of weeks.
The company, which manages the construction of big energy projects, has more than 9 per cent of its shares out on loan to hedge funds, which will make money if its share price falls.
The eight hedge funds targeting the firm include the well-known City group Marshall Wace.
On the surface, Petrofac is in a strong position. The £103 million firm has won contracts worth £4.4 billion this year.
It works in the gas and oil industries, but it has also positioned itself well in the long run by getting involved in the wind industry – enabling it to benefit from huge investments in renewables.
But Petrofac confirmed last week that City analysts were right to have been sceptical about its finances. It admitted it was struggling to procure guarantees from banks that effectively furnish its clients with ‘money back’ guarantees if there are hitches on projects. These guarantees are common features on construction contracts and Petrofac cannot acquire cash from clients unless arrangements are in place.
Fewer banks are backing new oil and gas investment and Petrofac itself has been battling losses over the past few years along with a large debt pile. In 2017 the company was rocked by a Serious Fraud Office investigation. The case was settled in 2021 with a fine of £77 million after Petrofac admitted failing to impede senior executives bribing officials in Iraq, the UAE and Saudi Arabia to ensure lucrative contracts. But all of this has left a dark cloud over the company’s reputation.
In its latest update, Petrofac said it was considering a range of measures to help bolster its position, including selling off some assets. The firm has also helicoptered in Aidan de Brunner, who specialises in steering companies through financial crises, to unite the board. He will commit ‘a significant portion of his time to supporting the board for a limited period’.
The group’s share price initially surged, but has since changed direction and is down by more than 70 per cent so far this year. Analysts remain unconvinced that it can turn itself around.
Brokerage Berenberg told clients the company was ‘in a precarious position’ and it has placed the shares under review, removing any rating or target price.
Jefferies dubbed Petrofac ‘the impossible stock’ and Peel Hunt also put it under review, warning that it may need to ask shareholders for new capital.
Derren Nathan, head of equity research at Hargreaves Lansdown, said the company’s shrunken market value is much smaller than its debt pile, which stood at £460 million at the half year, and is ‘likely to have risen advance’.
Petrofac declined to comment to the MoS, but a source close to the company said the business ‘has a positive future’.
