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Oil services to slow, but not slump

Created:
20 December 2007
Written by:
Daniel O'Sullivan

Oil and gas engineering specialists Petrofac and Wood Group are both set to exceed 2007 earnings expectations, according to recent trading statements. However, this upbeat news should not obscure the fact that capacity constraints signal a significant slowing of growth in the oil equipment and services sector in 2008 - so shareholders in Abbot Group will be pleased with the £900m bid for the company from a US private equity group.

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In recent interim results, oil-well-kit specialist Expro forecast a short-term slowdown in growth, primarily due to a global shortage of drilling rigs and trained personnel. As Oriel Securities analyst Joanna Craig comments: "They are all saying it, but Expro put it out in the open. There will be a pause for breath as people try to ramp up new capacity."

Wood Group spokesman Nick Gilman says that while his company has delivered operating profit growth of around 40 per cent for 2006 and 2007, this will drop to perhaps 15-20 per cent in 2008. "There is mounting pressure on the supply chain. In the North Sea, our clients are talking about costs and efficiencies, and that's a euphemism for beating us down on prices. In engineering, we're not seeing as many projects going ahead - although spend here is already at very high levels, and we see it staying there rather than growing," he says.

As Ms Craig says, the shortage of kit such as rigs means that international oil companies cannot spend money as fast as they would like. And the boon for those already holding such in-demand kit is clear to see in the very fully valued, agreed offer of 390p a share tabled by private equity vehicle Turbo Alpha for drilling rig supplier Abbot Group.

IC VIEW:

Buy

Wood Group at 428p and Petrofac at 527p remain good value, as the slowdown has been modelled into forecasts by analysts, yet both could surprise on the upside, as they have previously. The offer to Abbot shareholders looks unbeatable but they should await documents. The stand-out opportunity is engineer Bateman Litwin, whose shares have fallen sharply from summer highs due to concerns over US acquisition Delta-T and an attendant stock overhang due to the paper element of that deal. But the company trades at a 50 per cent discount to peers in forward PE ratio terms and the core businesses remain in great shape, so the shares are a buy at 200p.

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