ii view: Wood Group’s new CEO offers optimism

Shares for this oilfield services and consulting company are down over a fifth year-to-date. Buy, sell, or hold? 

First-half results to 30 June

• Revenue down 0.4% to $2.56 billion
• Operating profit before exceptional items down 8.9% to $41 million
• Net debt including leases up 21.5% to $2.16 billion
• Order book up 4.7% to $6.42 billion

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Chief executive Robin Watson said:

“Since becoming CEO in July, I have been really encouraged to see the improving operational momentum across our business, including some great client wins. The strong order book gives me confidence for the future, but there is a lot more to do on cash generation and this is our top priority.

“We are developing an updated strategy for Wood that will draw on our core strengths, return us to growth and deliver sustainable free cash flow. We perform complex work in critical industries and our outstanding technical expertise and strong long-term client relationships position us well for growth across targeted markets.”

ii round-up:

Engineering and consulting company John Wood Group (LSE:WG.) today reported falls in both revenues and profit as energy customer investment had yet to fully recovery from the pandemic and it continued its move away from large-scale projects.  

Operating profit fell 8.9% to $41 million as a near one-fifth retreat in revenues for its projects division more than offset gains for both its operations and consulting divisions. 

Wood Group shares fell by around 4% in UK trading to leave them down by around a quarter year-to-date. The FTSE-250 company has been busy restructuring the business including taking exceptional charges against previously undertaken contracts. 

A pending sale of its Built Environment Consulting business for $1.81 billion is expected to complete in the third quarter, enabling it to reduce debt. Shares for rival Petrofac (LSE:PFC) are up by close to 5% during 2022, while shares for major oil group and customer Chevron Corp (NYSE:CVX) are up by around a third year-to-date.  

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Wood’s expertise stretches from innovative pipeline design to wind turbine, tidal energy, and more general construction work. The sale of its less-specialist construction or built environment business is being made to Canada’s WSP Global. 

Wood Group reiterated its expectation for higher revenues over the full year compared to last year given a near 5% expansion in its order book to $6.42 billion. 

Detail on its updated strategy under its relatively new chief executive is expected to by outlined at its Capital Markets day on 29 November. 

ii view:

The group’s projects division provides construction and engineering services to all areas of conventional energy, process & chemicals and renewable energy & power. Its multi-sector consulting business offers over 10,000 consultants to the energy and the build industries, while its operations division provides maintenance and asset optimisation services. During its last full financial year, projects generated its biggest slug of sales at over 36%, followed by operations at around a third and consulting at just over a quarter of total revenues.  

For investors, management’s own desire to improve cashflow and growth in net debt warrant consideration. The price of oil, a key factor in undertaking capital expenditure projects, remains highly volatile, while rising interest rates and geopolitical tensions add to high economic outlook uncertainty. The dividend, a former attraction, also remains suspended. 

More favourably, the group’s strategy is being reshaped under its relatively new chief executive. Costs are a focus, legacy contracts have been addressed, while opportunity in aiding with the move to non-carbon related fuels under climate change is being pursued. On balance, and with overall revenues expected to start growing and debt lowered under its pending business sale, more speculative investors are likely to stay long-term patient.  

Positives: 

• Pursuing alternative energy contracts
• Targeting cost savings 

Negatives:

• Dividend suspended
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Buy