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AMEC positioned for growth

AMEC is in a good position to exploit an upswing in demand for oil services, thanks to changes in its business mix
January 24, 2013

Demand for oil services - the activities that keep oil fields and refineries running - is set to lift off after a four-year lull. That could give energy consultant AMEC (AMEC) a pricing power that would provide a useful boost to its profits, especially as the group's bosses are tweaking its services to maximise the benefit.

IC TIP: Buy at 1106p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Upswing in oil services demand
  • Improved business mix
  • Growing presence in offshore Norway
  • Buying in its shares
Bear points
  • Oil price uncertainty
  • Challenges in mining and nuclear power

AMEC's engineers apply their skills to designing and developing large-scale projects across the oil and gas sector. Energy companies employ AMEC as a consultant for construction projects on a variety of facilities, including offshore platforms, subsea pipelines, crude oil refineries and gas processing plants. They also engage AMEC to establish maintenance programmes, and to provide specialist advice on how to optimise production, improve safety or reduce costs. In other words, operators who have have a technical issue affecting their oil and gas facility can go to AMEC for a solution.

The value of demand for oilfield services has only recently recovered to levels seen before the financial crisis of 2008. Capital spending waxed and waned in the intervening period, but industry analysts now expect a step up in activity this year and next. That could give services providers, such as AMEC, the scale of pricing power that boosted their profits in 2005-07. According to consultancy GBI Research, the value of the market should grow by around 30 per cent to $200bn (£126bn) by the end of 2016. True, the biggest beneficiaries may be those companies that provide big pieces of capital equipment (submersible rigs, for example), but engineers and consultants, such as Amec, will benefit, too.

AMEC (AMEC)
ORD PRICE:1,106pMARKET VALUE:£3.31bn
TOUCH:1,104-1,106p12-MONTH HIGH:1,189pLOW: 914p
DIVIDEND YIELD:3.1%PE RATIO:14
NET ASSET VALUE:363pNET CASH:£290m

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20092.5420447.617.7
20102.9525973.026.5
20113.2625963.330.5
2012*3.9233170.032.0
2013*4.2235981.334.0
% change+8+8+16+6

Normal market size: 2,000

Matched bargain trading

Beta: 1.3

*Societe Generale forecasts (profits and earnings are not comparable with historic figures)

Admittedly, the extent to which oil companies invest depends on crude oil prices. Saudi Arabia, the world's biggest exporter, is keen to keep prices at around $100 a barrel, which is more than adequate to justify planned capital spending. That said, the oil price - and the consequent level of investment - is still sensitive to sluggish economic growth worldwide.

And growth prospects for some of AMEC's other segments - namely mining and nuclear power generation - don't look so good. That's because almost all of the world's biggest mining companies have either shelved or axed big capital projects since midway through last year. Meanwhile, the expansion of the world's nuclear power industry remains on hold following Japan's Fukushima disaster in 2012. In aggregate, these businesses account for around 22 per cent of AMEC's revenues.

However, AMEC's strong links to national oil companies (NOCs) in the Middle East should be a help. Analysts at investment bank Societe Generale predict that oil services are set to benefit from a 15 per cent rise in investment by NOCs in 2013. AMEC is already seeing the fruits of a $6bn long-term project management contract with the state-owned Kuwait Oil Company. And last month the group expanded its footprint in the Gulf with a $528m consultancy contract to help develop an oil refinery at Al Zour, Kuwait, for the Kuwait National Petroleum Company.

Other forecasts point to the potential in running offshore fields. Energy consultant Douglas Westwood expects over $335bn spending in offshore operations and maintenance (O&M) in 2012-16. Over the previous five-year period, production-related services accounted for 44 per cent of global O&M spending. But many offshore oil and gas fields are maturing, which means operators will need to increase their O&M spending in order to maintain production. Douglas Westwood predicts that demand for offshore production services should grow by over 7 per cent a year until 2016. That is good news for AMEC because management has tweaked the group's product offering to exploit the expected growth in O&M contracts. AMEC is also much better-placed to tap into the rapid expansion of offshore activities on the Norwegian Continental Shelf, as a result of a collaboration agreement it signed with Aibel - one of the largest oil service companies in Norway.