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Wood Group: oil services yet to feel industry uplift

Wood Group is struggling; caught between reduced upstream budgets and the as yet unfulfilled promise of massive green spending projects
Wood Group: oil services yet to feel industry uplift
  • Weak first half for Wood Group, with no return to dividends
  • Full-year guidance maintained and order book improves, however

A rising tide has not lifted all boats in the oil sector. While the oil majors have ramped up dividends and the profits have climbed back to pre-pandemic levels, the services companies that rely on rising industry expenditure have not seen the same conditions. 

In the first half - first quarter even - Royal Dutch Shell (RDSB) and BP (BP.) were already increasing shareholder pay-outs. For Wood Group (WG.), it’s still too soon to restart dividends. Total revenue fell almost a quarter in the first half, and its operating profit is still below the 2019 level at $68m. 

“Whilst we are encouraged by improving momentum in activity and early signs of markets recovering, performance in the first half of 2021 reflects the ongoing impacts of Covid-19,” the company said. It also recorded a cash outflow of $100m for the period under review. 

Wood Group, which engages in project and consulting work across energy sectors, also saw a dip in renewables activity in the first half, with revenue from that sub-sector falling a quarter. 

The company is also involved in green hydrogen and carbon capture and storage (CCS) projects. Both are held up as possible aides to reaching net zero targets but are not yet proven at scale. Green hydrogen production involves using renewable energy to produce the alternative fuel. 

Oil companies have leapt on green and blue hydrogen (where CCS is used to make the hydrogen production process cleaner) as it can feed into refineries and serves as another product they can sell. “Blue hydrogen, integrated with carbon capture and storage, can provide the scale and reliability needed by industrial processes,” said BP low carbon boss Dev Sanyal earlier this year. 

For Wood Group, renewable and new energies represent “strong growth opportunities in the medium term”. Consulting firm Wood Mackenzie (unrelated to Wood Group) also said this week that hydrogen “has the potential to decarbonise hard-to-abate sectors such as heavy industry and heavy-duty transport and chemicals”, which are responsible for a third of global CO2 emissions.

Ramping up hydrogen production without also ramping up emissions is reliant on much greater renewable energy capacity, however. 

On a company level, fellow oil services and technology company Hunting (HTG) offers a direct comparison for Wood Group without the green angle. It had a similar experience to Wood Group in the first half, at least regarding weaker earnings. At the end of June, Hunting warned investors it was facing an interim cash loss for the 2021 as “strong capital discipline” from potential clients, as well as heavy competition in the services sector in the US, depressed sales. 

Its key division, Hunting Titan, has been a drag on earnings for some time as the US shale sector struggled with low oil prices. But that has reversed this year. “Overall, Hunting Titan and the group's onshore businesses have traded ahead of expectations in the period, however, this has been more than offset by a lower performance from Hunting's offshore and international businesses,” chief executive Jim Johnson said. 

Both companies were positive about their second half prospects. “Trading momentum and good growth in our order book, which is up 18 per cent year-to-date, underpin our confidence in delivering a stronger second half which will reflect a return to growth compared to both H1 2021 and H2 2020,” said Wood Group chief executive Robin Watson. 

Full-year revenue guidance is $6.6bn-$6.8bn, compared to $7.6bn in 2020 and $9.9bn in 2019. 

In the first half, Wood Group’s order book climbed 9 per cent from the comparable period in 2020 to $7.7bn. This growth is driven by the consulting and operations divisions, which will likely “offset lower activity in projects”, the company said. The 40 per cent drop in projects revenue in the first half, to $1.2bn, came partly because large projects came to a close and “new awards in process and chemicals and conventional energy being limited to smaller, early-stage scopes”. The division upped its adjusted cash profit margin from 5.3 per cent to 7.5 per cent as well, as Wood Group shed 3,600 jobs from the division. 

Consensus estimates compiled by FactSet have Wood Group’s full-year earnings per share at 23¢, flat on last year. 

Wood Group has a diversified portfolio and forecasts a better performance for the coming months. We don’t see a reason to get back in yet, however. Sell. 

Last IC View: Sell, 301p, 16 Mar 2021

WOOD GROUP (WG.)   
ORD PRICE: 230pMARKET VALUE:£ 1.55bn
TOUCH:230-230.4p12-MONTH HIGH:367pLOW: 197p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:633¢*NET DEBT42%
Half-year to 30 JunTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20204.080.90-2.20nil
20213.1518.4-1.70nil
% change-23---
Ex-div:-   
Payment:-   
£1 = $1.37 *Includes intangible assets of $6.2bn, or 920¢ per share