Ask a group of energy analysts their views on prospects for the UK's oil service providers and you're unlikely to get a common response. This partly reflects lingering anxieties linked to the severity of last year's correction. With Brent Crude trading just below $111 (£68) a barrel at the outset of 2013, few would have envisaged that share prices across the global sector would go on to fall by an average of 26 per cent.
The handful of oil service and equipment providers within Britain's FTSE 350 sector fared slightly better than many of their overseas rivals, but the associated index still fell by 19 per cent peak-to-trough in 2013, due largely to reversals for Petrofac (PFC) and John Wood Group (WG.). The pull-back will have mystified some investors, since many oilfield service operators are maintaining record order books, but the industry is notorious for payment delays and the rescheduling of contracts. Most of the companies now trade well below historic earnings multiples.
There's even some value on offer for highly-rated Kentz Corp (KENZ). The Tipperary-based oilfield contractor was even forced to rebuff the advances of Amec (AMEC) and Germany's M+W Group during the third quarter. Management's rejection of the £700m approach was justified by the subsequent rally in Kentz's shares, which has taken its stock market value close to £790m. Speculation linked to other bidders has persisted, but Kentz seems intent on running its own race. In keeping with the generally held view that bid activity will pick up through 2014, Kentz has agreed to buy US-based Valerus Field Solutions for $435m in cash, thus expanding its engineering capability and presence in Latin America. Not to be outdone, Amec subsequently announced a provisional offer to acquire global engineering group Foster Wheeler AG for $3.2bn.
| Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | Share price change in 2012 (%) | Last IC view |
| Hunting | 806 | 1,191 | 14 | 2.3 | -1.3 | Buy, 804p, 5 Dec 2013 |
| Kentz Corporation | 677 | 800 | 18 | 1.1 | 63.1 | Hold, 638p, 12 Dec 2013 |
| Petrofac | 1,242 | 4,296 | 11 | 3.4 | -24.6 | Hold, 1,215p, 18 Nov 2013 |
| Wood Group (John) | 676 | 2,534 | 11 | 1.7 | -5.6 | Sell, 670p, 20 Dec 2013 |
| Amec | 1,038 | 3,089 | 13 | 3.7 | 8.5 | Buy, 1,103p, 13 Jan 2014 |
The regional outlook is far from uniform as we move into 2014. The companies most likely to succeed are those with end-market diversification. According to the latest survey on industry investment trends by Norway's DNV GL, the North Sea and Norway have become less attractive for capital spending in 2014, while China, Malaysia and Canada have moved up the rankings. The US, Brazil and Australia will draw in the highest inward receipts. The report also highlights the ongoing skills crisis facing European operators, which is contributing to rising costs. Some larger projects in the North Sea have been scaled back as a result, but it's encouraging that research and development budgets for European oil and gas producers are still at historically high levels.
All the FTSE 350 constituents have been increasing their exposure to the US market - and with good reason. Estimates for fourth-quarter growth in the US have risen from 2.6 per cent to 3.5 per cent. If accurate, this would be the single highest rate of quarterly economic growth since the onset of the financial crisis. Growing confidence in the US recovery is driving expectations for domestic energy demand. Over the four-year period from 2008, the US added 1.2m barrels per day to production, and the US Department of Energy now predicts that the country will repeat the trick by the end of next year. Levels of infrastructure spending are expected to rise dramatically, particularly in Texas's Eagle Ford Shale and Permian Basin. The expansion of the shale oil industry will increasingly underpin earnings for equipment and services companies, while new engineering opportunities could arise for the likes of Amec and Kentz if Washington eventually addresses the US production glut by repealing 1970s-era restrictions on oil exports.
FAVOURITES:
From a thematic perspective, Hunting (HTG), a producer of specialist drilling equipment, remains our preferred choice in the sector. That's because the group's proprietary drilling technologies offer a way of gaining direct exposure to the shale oil boom. Demand for Hunting's technologies is underpinned by the growing preponderance of 'directional drilling' in the US rig count, but the group is now diversifying into Asia as that continent seeks to exploit its unconventional sources of hydrocarbons.
OUTSIDERS:
Although Petrofac lost over a third of its market value against the FTSE All-Share last year, it still doesn't offer a particularly strong value argument based on its historic earnings multiples. And with "flat to modest growth" expected through 2014, there aren't any obvious catalysts for a re-rating in the offing.
