ii view: Earnings fall by a fifth at Wood Group

Green energy growth is being pursued to counterbalance oil & gas, but is a work in progress.  

Half-year trading update to 30 June 2020

• Like for like revenues down 11%
• Adjusted profit (EBITDA) down 19% to between $295 and $305 million
• Net debt at 30 June to be down from late December 2019 total of $1.42 billion
• Financing facilities of over $3 billion

Chief executive Robin Watson said:

"The global engineering and consultancy market is facing unique and unparalleled challenges in 2020 from Covid-19 and volatility in oil prices.  The safety of our people, clients and suppliers remains our top priority through this period. Despite the disruption, we are continuing to successfully win and execute work, supported by our strategy of broadening the business across the global energy market & the built environment. 

The relative strength we are seeing in chemicals & downstream, the built environment and renewables, where we will double our revenues in 2020, is helping to mitigate the impact of challenging conditions in upstream and midstream oil & gas.  We have a proven track record of leveraging our flexible, asset light model at pace to protect margin and in Q2 completed the actions required to deliver overhead cost savings of over $200 million in FY 2020" 

ii round-up:

Global engineering and consulting company Wood Group (LSE:WG.) today pointed to a 19% drop in first-half earnings as the corona crisis and fall in the oil price caused disruption to orders. 

Adjusted profit or earnings before interest, taxes, depreciation, and amortisation (EBITDA) are expected to materialise at between $295 million and $305 million, given an 11% decline in the order book since December. 

Wood Group shares fell by more than 2% in early UK trading, giving back some of the 10% gain made earlier in the week following solar energy orders from a US power & energy customer worth over $200 million. 

Revenue adjusted for the prior sale of its nuclear and industrial services businesses is expected to be down around 11%.  The order book as of the end of May totalled $7 billion. 

Normally, around 80% of its full-year revenues are either delivered or secured at this point in the year. But the backdrop for 2020 generates a risk of further delays and postponements, leaving management prepared for a wider range of outcomes. Wood Group shares are down by just over 40% year-to-date. 

Cost savings of over $200 million for the full year are now being pursued in order to help offset the downturn. Savings measures include temporary director salary cuts, staff furloughing and reduced working hours along with halting more discretionary spending. 

In early April, as the Covid crisis unfolded, management cancelled the final 2019 dividend of 23.9 US cents per share conserving $160 million of cash. A review of policy is expected once the outlook has become clearer.  

ii view:

Approximately 85% of Wood Group’s business is energy related. Around 35% relates to the upstream (exploration and production) and midstream (transportation and storage) oil & gas industry, 25% for chemicals & downstream (refining and processing crude oil) and another 25% is conducted in relation to renewables and other energy. Broader construction accounts for the balance of around 15% of activity.

A strategy to broaden its business and align it with growth opportunities in energy transition and sustainable infrastructure is being pursued. For this first half, renewable energy activity rose by 4% while upstream and midstream oil & gas business fell by 5%.

For investors, the recent scrapping of its 2019 final dividend payment is a blow, blunting a major attraction. The outlook for the Covid pandemic and the direction of the oil price continue to create uncertainty. Given current challenges, the pace of debt reduction following its previous takeover of rival Amec Foster Wheeler is also, according to broker Morgan Stanley, disappointing. But swift action has been taken and its push into renewable energy is ongoing. Wood is a good business, but investors will need a long-term view on the shares.

Positives: 

• Winning alternative energy contracts
• Targeting cost savings of over $200 million 

Negatives:

• Order book down by 11%
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Strong buy