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John Wood responsive to the renewables transition

The energy services and infrastructure group is broadening the scope of its competencies in response to evolving end-markets
January 21, 2021

You get the impression that politics, rather than dispassionate analysis, is increasingly to the fore when the investment case for the oil and gas industry is being assessed. The inevitable marginalisation of the industry has become an article of faith for some. This viewpoint was given additional ballast by the largest oil industry write-downs in at least a decade through 2020, although there were extenuating circumstances, to say the least.

The International Energy Agency (IEA) sketches out several scenarios every year detailing global energy consumption and how it will be met. There are any number of variables at play, and none of the scenarios should be treated as forecasts, as the agency would have to second-guess the future intentions of policy-makers.

But when you thumb through the IEA’s latest Stated Policies Scenario, which “reflects the impact of existing policy frameworks”, it highlights that we are on a middling path in terms of energy transition. In other words, existing policy commitments, be they public or private, come up short of a “trajectory consistent with shared sustainable energy goals”.

That gap could narrow, of course. It will be revealing to see what legislative changes the Biden administration will make, beyond simply falling back into line with the Paris accords. Renewable energy currently provides around 11 per cent of US primary energy needs, but only a quarter of that figure relates to wind/solar power; the lion’s share of renewable energy generated in the US is through biomass/hydroelectric.

The point is that any US transition in favour of sustainable energy sources is likely to be an expensive, drawn-out process. This also applies to China’s vast economy, so it is doubtful whether we will witness overnight change regardless of the column inches devoted to the imminent death of fossil fuels.

Those investors who have kept faith with the sector would be well advised to target those companies that are intent on managing the transition successfully. A recent trading update from John Wood (WG.) shows that adjusted cash profits (Ebitda) and the group order book both contracted by 22 per cent through 2020. However, its renewables segment was resilient in the face of pandemic-linked commercial disruption, evidenced by new engineering, procurement and construction contract awards for onshore wind and solar projects in the US.

The energy services and infrastructure group saw reduced activity on upstream, chemicals and downstream projects. But that is set against three new oil and gas scopes with Equinor ASA (EQNR: NO), further LNG renewal work in Asia Pacific, and an evaluation of the decarbonisation of industrial areas in the north east of Scotland. Clearly, a broader scope and specialist competencies point the way forward. Even so, John Wood and its industry peers will require agility to respond effectively to evolving end-markets. A parallel advantage from the group's evolution is the long-term support it could garner from environmental, social and governance mandates.

Looking ahead, the group’s immediate performance could still be hobbled through upstream projects being either scaled back or deferred, but 60 per cent of the group’s $6.2bn (£4.57bn) order book is to be delivered in 2021. Although net debt as a proportion of cash profits has remained broadly static, the group has wiped off around $400m in net borrowings to around $1.03bn at 31 December 2020. We shouldn’t expect too much this year; upper end profit guidance of $640m is at the lower end of consensus, but John Wood now has much longer horizons.