FTSE 250 could slip up on oil services drama

Mid-cap oil shares were amongst the worst performers on London’s stock market on Thursday, as a drama unfolded at oilfield services firm Petrofac.

Petrofac stock tumbled as much as 34%, dragging the FTSE 350 Oilfield Services & Equipment index down about 10% after the company suspended its chief operating officer until further notice.

That followed news that the Serious Fraud Office (SFO) questioned him as part of a probe into Monaco-based vehicle Unaoil. Both Petrofac COO Marwan Chedidhave and chief executive Ayman Asfari were questioned under caution by the Serious Fraud Office (SFO) about a fortnight ago in connection with the probe. Petrofac said in a statement on Thursday that it is cooperating with authorities.

The SFO last July launched a criminal investigation into Unaoil, its officers, employees and agents in connection with suspected bribery, corruption and money laundering as part of a wider probe into alleged corruption in the global oil industry. Petrofac had engaged Unaoil for the provision of local consultancy services in Kazakhstan between 2002 and 2009.

Shares of the FTSE 250’s other well-known oil services groups, Wood Group and the company it is in the process of buying for £2.2bn, Amec Foster Wheeler, also fell, losing between 3%-5% by mid-morning on Thursday. Wood Group said earlier in the week that it was looking into its own past dealings with Unaoil. Its prospectus for the Amec takeover also stated that the SFO had requested info from Amec about the probe.

Small oil services sector has fair weight

Wood Group and Amec investors are likely to be wary that investigations may turn up new information that is material enough to delay or perhaps even suspend the tie-up for a lengthy period. Wood Group itself was involved in a JV that engaged Unaoil and made payments to it “under agency agreements”, according to the prospectus. Information reviewed by Wood so far had “not confirmed that the payments made by the joint venture to Unaoil were used by Unaoil in ways that would amount to bribery, corruption or money laundering offences”, or that involved knowledge of such offences by staff in Wood Group, or the JV. Wood’s internal investigation is expected to be completed in the coming months, though its proposed merger with Amec will be put to a shareholder vote next month.

In the meantime, the SFO’s investigation is likely to keep a cloud over the oil services industry and extend share price declines, particularly of Wood Group, which had lost about 15% in the year to date up till Wednesday’s close. Investors in wider sectors of the FTSE 250 mid-cap index will also be vigilant. The oilfield sector as a whole constitutes a weight that is close to that of large components like Inmarsat, Investec, and G4S.

Whilst the FTSE 250 is largely matching the performance of the blue-chip FTSE 100 index so far this year—rising 22.5% vs. the flagship gauge’s advance of 23.9% at last check—it’s conceivable that extended slides by oil services shares could exert a drag on the mid-cap list from here, unless the SFO’s probe narrows in more tightly on Petrofac.