Broker snap: Petrofac now Citi's most preferred stock

13th Jun 2013 11:24

Citigroup has raised its recommendation for oilfield services giant Petrofac from 'neutral' to 'buy', saying it sees scope for a re-rating following its recent slump.The target price however has been cut from 1,650p to 1,600p to reflect recent weakness - the stock has fallen by around 22% so far in 2013.The broker said that the stock has de-rated in recent months on the back of delays to a the In Salah gas project in Algeria as well as a lack of opportunities in the Middle East."We see scope for a re-rating over the next twelve months as the current backlog underpins 14% earnings growth in 2014 and award intake continues to accelerate," said Analyst Ryan Kauppila."Given the potential catalyst afforded by an active 2H pipeline, we add Petrofac as a 'Most Preferred' stock in our three-month 'Best Ideas' database."Kauppila pointed out that during the 2008-10 commodity downturn, Petrofac's backlog doubled. However, while margin delivery has been "healthy" since then, recent profit warnings by competitors have raised concerns that "skeletons may be lurking". "In our view, this looks unlikely," he said."Petrofac's method of accounting takes a more conservative approach to profit recognition than peers, so is less likely to encounter losses as projects reach completion. Several large projects are expected to complete over the coming six-12 months, which we expect to benefit 2014 earnings as contingencies are released."The stock was up 0.71% at 1,270p by 11:30 on Thursday.