HSBC downgrades Petrofac on 'known unknowns and unknown unknowns'

HSBC analysts downgraded Petrofac on Monday after taking another look at the implied fair values of the oil engineer in light of the recent developments in the Serious Fraud Office investigation.

Earlier this month, a former Petrofac global sales executive pleaded guilty to eleven counts of bribery as part of the SFO's ongoing investigation into the company, with charges related to bribes to influence the award of contracts in Saudi Arabia and in Iraq between 2012 and 2015.

HSBC said felt investors are now unsure about the potential scope and financial implications of the investigation, worried about the risk of further legal action from the SFO or an investor class action suit,. Furthermore, it is unclear how much risk is ‘priced-in’ to the current valuations and whether there are implications for the company winning further contracts.

Analysts examined various SFO scenarios, adding in the $40bn-plus of contracts awarded in Iraq and Saudi Arabia on top of the original $2bn of Kazakhstan awards that the SFO initially had indicated were the focus of the probe.

"We reach a potential range of implied fair values of 355-830p and estimate that up to circa $2.25bn in penalties and franchise impact may be ‘priced in’ to current valuations," the analysts said, revising their discount for the SFO investigation uncertainty in their valuation from 20% to 50% among other adjustments.

Wondering if the case is now "a known unknown or an unknown unknown", the analysts see the results announcement on 28 February as the next likely date for a qualitative update on the case.

HSBC's rating was downgraded to 'hold' and target price to 380p as the potential expansion of the SFO case "has the potential to overshadow the shareholder story over the coming years if a substantial fine is levied and the company franchise is impacted".