Stock of the Week: Wood Group
This week’s stock pick has recently been upgraded to a ‘buy’ following an increase in investing activity and contract awards owing to the recovery of oil prices.
Oil support services companies such as Wood Group have suffered a turbulent number of years as the oil producers cut back on investment spending after the plunge in oil prices since the middle of 2014. Winning contracts or even renewing existing contracts became extremely difficult and the downturn resulted in the disappearance of some companies.
Wood Group, being one of the larger, diversified and more conservatively managed companies, managed through the downturn relatively well and along the way they acquired one of their rivals, Amec, which got into trouble after acquiring shale oil assets just as the oil price collapsed.
With the slow recovery of the oil price, producers have picked up on spending again and contract awards are filtering through which is reflected in Wood Group’s strong order book. Half year results in August were encouraging as revenues headed higher by 13.4% to $5.4bn; however operating profits fell by 1.5% to $260m. This was due to the expected costs of integrating acquired assets.
With the group’s activity normally weighted towards the second half, management believe they are on target to deliver on their forecasts and the markets expectations on a return to net profits. Prospects for 2019 are improving, with major producers allocating more capital to expand capacity.
Although there are always geopolitical issues that can cause volatility in the energy markets, the lack of capital expenditure during the oil price slump means there is pent up investment capital to expand productive capacity and Wood Group is well placed to take full advantage.
With all this in consideration, we suggest a ‘buy’ recommendation for investors seeking a balanced return and willing to accept a medium-to-higher level of risk.