ii view: John Wood Group shares plunge again

Full-year trading update to 31 December

• Expects full-year 2024 adjusted profit (EBITDA) of around $450 million to $460 million (£363 million)
• Expects net debt (excluding leases) as of 31 December 2024 of $690 million
• Order book $6.2 billion, up from $5.4 billion in late September

Guidance:

• Now expects negative free cash flow (FCF) in 2025 of between $150 million and $200 million

Chief executive Ken Gilmartin said:

“This is a difficult announcement amid our transformation. While we have made progress, I am disappointed in our financial performance. Consequently, we are taking decisive actions to ensure we can meet the opportunities we have in growing markets, principally energy.

"While the likely findings from the independent review are expected to have no material impact on the Group's cash position and future cash generation, it clearly gives us areas to focus on and we are initiating steps now to further improve our financial culture, governance and controls.

"As we look ahead, notwithstanding the challenges today, I am confident the fundamentals of this company remain strong - we are in growing markets, with considerable in-demand engineering skills, trusted client relationships, and we're well positioned to grow the business."

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ii round-up:

John Wood Group (LSE:WG.) today offered some reassurance regarding an ongoing audit review of its accounts by Deloitte, but outlined guidance for the 2025 financial year that were below its own forecasts made in November.

The energy industry-focused engineer and consultant does not expect Deloitte’s findings will have a material impact on the company's cash position, or its ability to generate cash in the future. Weaker trading and expenses required to execute cost cuts are however both expected to contribute to negative free cash flow in 2025 of up to $200 million, with positive FCF now only expected in 2026. 

Shares in the FTSE 250 company tumbled 30% in UK trading having plummeted by 55% in November when it detailed Q3 trading and a review by Deloitte. Rival Petrofac Ltd (LSE:PFC) is down by 75% over the last year, while the FTSE 250 index is up 10% over that time. 

Wood Group’s expertise stretches from oil and gas pipeline design to wind turbine and tidal energy projects. Under Deloitte’s review, Wood Group is now evaluating the extent of prior year adjustments which management expects will be required on previously reported adjusted profit (EBITDA) for the full year 2023 and any prior periods. 

Management is also initiating steps to strengthen the company's financial culture, governance and controls given these identified weaknesses and failures. 

Wood, which operates across the three divisions of projects, laying new pipelines for example; operations, maintaining customer facilities; and consultancy; reported a year-end order book of $6.2 billion. That’s up from $5.4 billion in late September, driven by contract wins with BP (LSE:BP.) and Esso.

Wood Group forecasts an adjusted 2024 profit (EBITDA) of up to $460 million compared with $423 million in 2023, although with a statutory loss of $105 million reported in 2024. 

Group net debt and excluding leases as of 31 December is expected to come in at $690 million, marginally down from $694 million at the end of 2023. 

Broker Morgan Stanley maintained its ‘equal weight’ stance on the shares post the trading update. Full-year 2024 results are likely to be announced late March.    

ii view:

Headquartered in Aberdeen, John Wood Group employs over 30,000 people. Both the projects and operations divisions generated just over 40% of revenues each during 2023, with consultancy services making up the balance. Geographically, the USA generated most sales in 2023 at 24%. Other major contributors included the UK at 13%, Canada 6%, Australia 5% and Saudi Arabia at 4%. 

Previously announced contract wins have included support for a major offshore clean power project in Germany, engineering work for a green hydrogen project in Spain, along with helping oil major BP with its Murlach North Sea development. 

For investors, an ongoing review of its accounts and potential past discrepancies which may impact future profits cannot be overlooked. Expected year-end group net debt of $690 million (£545 million) compares to a current stock market value of £310 million. A majority of the company's debt facilities mature in October 2026, while the uncertain economic outlook continues to cast a shadow over energy demand and therefore required infrastructure spend. 

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To the upside, management does not expect Deloitte’s findings will have a material impact on the company's cash position or ability to generate cash in the future. Steps to strengthen the company's financial culture, governance and controls are underway. A refreshed strategy includes simplifying the business and targeting cost savings. Both diversity of geography and business type exist, while a previous attempted takeover of the company and the now lowered stock market valuation could see M&A speculation return.   

In all, corrective management actions continue, with the increased order book suggesting continued customer confidence. That said, the increased level of uncertainty created by the ongoing audit review means John Wood shares remain a very high risk investment.  

Positives: 

• Pursuing energy transition contracts
• Subject to a previous takeover attempt 

Negatives:

• Deloitte accounting review
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Strong hold