Investors are positioning themselves for a set of solid results from North Sea oil and gas services company Wood Group next week, nudging the Wood Group share price up 1.5% this morning. However, the firm, which two years ago bought North Sea peer Amec Foster Wheeler is facing both tailwinds and headwinds ahead.
On the one hand the results release next Tuesday is expected to show full year revenues at the upper end of expectations helped by the company’s expansion and an improving environment in the oil industry. And yet Wood is far from being able to relax.
At its last trading update in early December the firm said its operating earnings are slightly worse than the consensus while its level of debt has significantly risen, partially because of the Amec Foster Wheeler acquisition. At the time Wood said that the outlook for the industry was generally favourable, which was later confirmed with two new contracts signed this year: the multimillion dollar construction of a biofuels facility in Oregon and a contract for Siemens for installing a gas turbine at its power plant in North Carolina.
But the issue overhanging Wood Group 2018 results is the increased level of debt which has gone from just under $1 billion to close to $3.3 billion, completely overshadowing the company’s operating cash flow currently in the region of $660 million. The company’s new projects should go some way towards denting its debt, as will the $54 million cash proceeds from the sale of a stake in its non-core joint ventures but this is unlikely to show in the bottom line until much later this year.
Amec Foster Wheeler intergration
It has been slightly over a year since Wood Group completed the acquisition of peer North Sea Amec Foster Wheeler, not enough time to fully integrate their operations; however the results presentation should shed some light on how much progress Wood has made with assimilating Amec’s operations into its own businesses. In the long run, the acquisition not only expanded Wood’s operations and provided it with a pipeline of new project opportunities but also took out one of its three competitors in the North Sea.
The current level of oil prices of close to $70 a barrel are at a fairly comfortable level for Wood Group which manages to produce a barrel of oil equivalent for around $20. In the bigger picture, OPEC, Russia, the US and Trump are all pulling in slightly different directions and the upshot is something akin to a standstill.
The US sanctions on Venezuela and Iran are creating a slight shortage in the market but this is being compensated by rising production from US shale oil. Saudi Arabia and Russia have agreed to reduce the amount of oil they are pumping out in order to prop up prices but that again was counterbalanced by President Trump asking Saudi Arabia for more oil and lower prices.
The big deciding factor in all of this will be China and the state of its economy, which will have more capacity to knock down prices than any of the above because it could trigger a global economic and industrial slowdown.
Still, as long as oil prices remain within the current range Wood Group is well positioned for the remainder of 2019 and should see healthy growth in future revenue and profits.