ii view: Wood Group reports pandemic pain

Exposure to oil & gas has hurt, but green energy is being targeted and consulting services remain robust. 

Half-year trading update to 30 June 2020

• Like for like revenues down 21% to $3.2 billion
• Adjusted profit (EBITDA) down 12% to between $255 and $265 million
• Order book at end of May of $6.9 billion, up 6% on December 2020
• Net debt at 30 June expected to be around $1.15 billion, up from $1 billion in December 2020

Chief executive Robin Watson said:

"Following a steady start in Q1, we have seen improving momentum in activity in Q2 with growth in Consulting and Operations compared to Q2 2020. Our full year outlook is unchanged with trading momentum and growth in our order book.”

ii round-up:

Global engineering and consulting company Wood Group (LSE:WG.) today flagged expected double-digit declines in both revenues and profits over its first half as curtailed customer plans during the pandemic continued to bite.

Like-for-like revenues for the period to the end of June are expected to fall by just over a fifth to $3.2 billion, as reduced project activity in industries such as oil & gas and chemicals more than countered robust activity for its consulting business.

Wood Group shares fell by more than 4% in UK trading, leaving them up by less than 10% over the last year. That’s well below the near-one-fifth gain for the broader FTSE All share index over the same time, although better than a one-third drop for fellow oil services company Petrofac (LSE:PFC). 

The fall in revenue proved worse than forecasts, according to broker Morgan Stanley. Adjusted profit, or EBITDA, is expected to fall by around down 12% year-over-year to between $255 and $265 million.

Wood Group provides engineering and consulting services to the energy industry and others across more than 60 countries. Its expertise stretches from innovative pipeline design to wind turbine and tidal energy.

Its order book of $6.9 billion at the end of May was 6% up from the start the year, with management confident of a stronger second half. The adjusted profit margin is also expected to improve given a greater weighting of higher margin consulting activity. 

The full-year outlook remained unchanged, with trading momentum and expansion in the order book underpinning confidence that the company will return to growth in the second half. 

ii view:

Wood Group operates via the three divisions of projects, consulting and operations. The projects business, accounting for around 40% of revenues, offers construction and engineering to all aspects of Conventional Energy, Process & Chemicals and Renewable Energy & Power. The consulting business, accounting for a further 30% of sales, provides some 12,000 consultants to the energy and the build industries, while the operations division provides maintenance and asset optimisation services. 

Approximately 85% of Wood Group’s business is energy related. 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 investors, the impact from the pandemic continues to be seen. The dividend, a former attraction, was previously halted, and fines from regulatory investigations are likely to drag on cashflows for the next three years.  That said, management action has been taken, including cost cutting, while a push into renewable energy is ongoing. An improved second half is forecast and the valuation remains undemanding given an estimated price/earnings (PE) ratio below the three and 10-year averages. In all, the shares remain higher risk, but may offer appeal to speculative investors taking a long-term view. 

Positives: 

• Winning alternative energy contracts
• Targeting cost savings 

Negatives:

• Ongoing pandemic uncertainty
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Strong hold