Knock on Wood Group

John Wood Group (WG.) has delivered a second profit warning for 2014, reflecting a broad-based slowdown in its end markets. The oil and gas services company still expects "growth overall" in 2014, but this is mainly based on contributions from completed acquisitions rather than organic growth. Its share price fell by a sixth on the news to 670p.

Management last updated the market in August, when it expected operating profit in 2014 at the main engineering business to be flat year on year. Management now expects profit to fall by 15 per cent, reflecting the recent completion of two major projects and the slow pace of project approval elsewhere. The backdrop is clearly worsening and the slowdown appears to be broadly based, affecting large and small projects and customers alike, with activity in the Gulf of Mexico and Canada oil sands standing out as especially weak areas.That's because the major multinational oil and gas companies are starting to make real strides with cost-cutting and the control of capital expenditure.

On the bright side, Wood's PSN maintenance services division is performing well and management expects "good growth" here overall for 2014. Increased exposure to US shale drilling is largely behind this, thanks to the recent acquisition of US shale-centric services provider Elkhorn.

Credit Suisse says…

Outperform. There's no getting around the fact Wood's trading update contains little festive cheer. It implies at least a 5 per cent downgrade to consensus forecasts earnings for 2014; maybe more. The main issue is that upstream project delays have extended even further since August. Yet these projects are generally being delayed rather than cancelled outright and we would use share price weakness to add to holdings as we still see Wood as attractive through being asset light with low lump-sum exposure. We lower our 2014 and 2015 earnings estimates by 9 per cent and 2 per cent, receptively, to 99¢ and 116¢, with 98¢ expected for end-2013. We consequently lower our blended target price to 850p a share from 900p.

Canaccord Genuity says…

Hold. Wood's surprising guidance for 2014 has led us to cut our 2014 and 2015 earnings estimates by 6 per cent to 101¢ and 106¢, respectively. We now forecast organic revenue growth of 3 per cent in 2014; the fourth year of the expansion cycle since the trough of 2010. Despite the share price fall, we believe the shares are currently fairly valued given the slower pace of growth expected in the short term. Wood's shares now trade on 11 times our 2014 earnings estimate, compared with a sector average multiple of 13.1 times. Our target price stands at 825p.