Broker snap: Citi labels Petrofac as most preferred UK oil services name

15th Oct 2013 12:38

Citigroup has labelled Petrofac as one of its most preferred stocks among oil services names in the UK ahead of the sector's third-quarter reporting season."The underperformance of the oil services sector year-to-date reflects the market's disbelief in growth delivery following recent operational disappointments," Citi said.The bank said that the third quarter suggests an inflection point for the industry: "Activity remains robust ? forecast 3Q revenues and backlog over 10% year-on-year ? and we expect group-level operating margin to show the first sequential increase in six quarters. "Our investment thesis around oil services has long favoured names exposed to low-cost areas of investment (i.e. Offshore, Middle East) where we continue to see resilient industry spend. Across our preferred names, we see this supporting further backlog, revenue, and margin growth into 4Q/2014."Among UK-listed stocks, Citi said that Petrofac is exposed to defensive energy investments, such as the Middle East, the Commonwealth of Independent States and Integrated Energy Services. The company's backlog is up over 50% year-on-year and the bank sees scope for this to further increase over the next six months.The bank said that Petrofac trades at nine times 2015 forecasts and that the stock "looks compellingly priced in our view". It retained a 'buy' rating and 1,600p target price.AMEC however is the least preferred oil services name, given that it trades at a 10% premium to Petrofac (on 2015 estimates). The stock is rated 'neutral' at a target price of 1,100p.Citi said that AMEC's valuation "looks to underestimate the risks of further spending cuts in areas of high-cost resource (e.g. mining, oil sands) where Amec has a material presence".BC