Wellstream, which supplies flexible pipelines used mainly by deepwater floating oil and gas platforms, has received several preliminary approaches regarding a possible offer for the company. Whether or not these manifest an actual offer, they could herald the return of good times to the oil services sector.
The recent reporting season confirmed generally low market expectations of the sector, but many agree that the worst of the cycle has now passed and that growth will return next year. Why is the environment for oil services looking so positive? The oil price has stabilised in a $70-$80 per barrel range, which should give oil companies the confidence to increase investment. Moreover, analysts point to the economic recovery having reached the stage where downstream divisions - refining and marketing - shouldn't get any worse.
The oil services sector has already risen strongly this year. Analysts at Liberum Capital calculate that the sector has outperformed the UK market by 25 per cent and the exploration and production sector by 15 per cent. They expect very strong earnings growth for at least two years, and estimate that the sector trades on an average cash-adjusted 2011 PE ratio of just under 13. Arguing that this fails to reflect strong expected performances over the next year or so, they expect oil services shares to continue to rise.
Several oil service firms look attractive against this backdrop, but Wellstream doesn’t appear the obvious top target. Its fortunes remain heavily dependent on Brazil, in particular state giant Petrobras. Elsewhere, Wellstream’s markets remain tough and its Newcastle operation retains a perilously thin order book.
Petrofac and Kentz on the other hand continued to deliver impressive earnings growth and strong - often record - backlog (orders and work-in-progress) through the downturn. Their businesses focus more on Middle Eastern engineering and construction contracts that are less influenced by short-term, oil price-driven drilling activity.
Even among Wellstream’s drilling services peers, other firms such as Wood Group look to offer stronger, more diversified prospects. Its chief executive Allister Langlands expects current year spending on exploration and production to be 5-10 per cent higher than in 2009, and is reporting higher bidding volumes, fewer project delays and increasing backlog.
