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FTSE 350 oil equipment & services: Oil services shares no longer cheap

Oil services companies may be confident of continued underlying growth in 2013, but we're cautious on the sector in light of cooling demand
January 18, 2013

Oil prices have remained stubbornly high despite the global economic downturn, and so too have the share prices of oil service companies. Shares in the five FTSE 350 companies within this sector currently trade on an average of 14 times earnings – not exorbitantly expensive for a sector that has been buoyed by the commodities boom, but hardly a bargain either.

Yet such forecasters as the International Energy Agency (IEA) expect relatively sluggish oil and gas demand growth in 2013, largely because growth in emerging economies is being counterbalanced by slowdowns in much of the developed world. At the same time, major oil and gas companies are starting to delay and reduce their ambitious development spending programmes in favour of hiking dividends.

Smaller oil and gas operators in risky jurisdictions are also finding financing increasingly difficult to come by, which is delaying lucrative new contracts for oil services firms. Petrofac's (PFC) latest joint venture with Bowleven (BLVN) is a good example – rather than wait for Bowleven to find $500m (£312m) to fund the development of its Etinde project in Cameroon, Petrofac's integrated energy services division agreed to cough up the money in return for a share of cash flows. Accordingly, growth prospects in the sector over the next few years could come under pressure.

True, activity in the sector isn't likely to grind to a halt as it did in 2008 – there could even be a good start to the year if the US economy begins to ramp up. In fact, during 2012, a year in which oil demand growth was fairly sluggish, shares in the five FTSE 350 oil services companies rose 6.7 per cent on average. But that fails to take into account the poor share performance of those companies in the sector that fell out of the FTSE 350 during the year, Lamprell (LAM) and Cape PLC (CIU). Their shares fell 67 per cent and 38 per cent, respectively, after reporting severe cost overruns and delays – which demonstrates the risks that companies in this sector can face.

On that basis, current share price valuations could be pricing in overly optimistic growth expectations – leaving those ratings potentially vulnerable. And investors would be wise to monitor closely each company’s order book and prospect pipeline.

 

 

COMPANY NAMELATEST PRICE (P)MARKET VALUE (£M) PE RATIODIVIDEND YIELD (%)PERCENTAGE CHANGE IN 2012LAST IC VIEW
AMEC1,0463,14613.23.110.5Buy, 1,092p, 09 Aug 2012
HUNTING7951,16914.22.05.4Buy, 781p, 30 Aug 2012
KENTZ  39846812.51.9-8.2Buy, 390p, 30 Aug 2012
PETROFAC1,6815,81414.52.212.6Hold, 1,478p, 13 Aug 2012
WOOD GROUP (JOHN)749279516.11.313.3Hold, 823p, 21 Aug 2012