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Wood Group 'break-out' some way off in the distance

A raft of new renewables contracts points the way forward, but legacy work continues to drag on financial performance
June 24, 2021

Like the Brexit debate, Covid-19 may be used to hide a multitude of sins. Over the next few months investors will be trying to determine where pandemic-linked disruption ends and poor underlying performance begins.

The latter characterisation may be slightly unfair where Wood Group (WG.) is concerned. Shares in the engineering group were marked down following release of an interim trading update, but with a sizeable chunk of revenue still generated through oil and gas contracts, it is little wonder that first-half metrics came up short of expectations.   

Adjusted cash profits for the June half-year are expected to be in the range of $255m-$265m (£183m-£190m), 13 per cent down on consensus forecasts, while like-for-like revenues are guided to drop by a fifth year on year to roughly $3.2bn.

Profits have been constrained by additional costs relating to certain legacy projects, but management is still guiding to a 60-90 basis point increase in the underlying margin, as the proportion of higher-margin consultancy work crept up through the period.

That favourable mix is also reflected in the group’s order book, up 6 per cent from the December year-end, with consultancy work up 13 per cent in the year to date. For investors, it isn’t so much the increase in the backlog as the fact that the new business is being driven by what management describes as “growth opportunities from the energy transition and drive for sustainable infrastructure”.

During the period, the group was appointed by Luxcara GmbH as engineer on its Önusberget wind farm project, which, upon completion, is set to become Europe’s largest wind farm. The development will underpin Sweden’s goal of becoming carbon neutral by 2045.

After the period-end, Wood Group also secured contacts worth around $53m from ADNOC Onshore, a subsidiary of the Abu Dhabi National Oil Company (ADNOC), thereby building on existing partnership arrangements with the diversified energy producer.

And the group is also employing its engineering expertise in a scoping study that will determine the best way forward to transform a diesel-powered public transit system in Oakville, Ontario, to one that employs zero-emission vehicles. That will include determinations over bus routes and battery charging station locations, along with the types of buses in the fleet.

The increase in ‘green-tinged’ consultancy work will continue to support margins and logic suggests that the share of revenues generated by renewables contracts – currently around 25 per cent – will increase over time. That said, it’s conceivable that the narrowing supply/demand balance in the crude oil market could constrict any proportional increase in the near-to-medium term.

Peak-to-trough, Wood Group’s shares have lost four-fifths of their value over the past five years. So, even though the share price has stabilised over the past year, it would be disingenuous to suggest the stock is in turnaround mode, even though the business mix is steadily becoming more favourable. This is borne out by current analyst recommendations, suggesting that the shares are at ‘slack water’, neither ebbing, nor flowing.

Yet it’s projected that renewables will attract 70 per cent of global energy investments this year, so it would be unwise to ignore Wood Group’s evolution indefinitely. The group has also been paring back debt steadily, meaning that the gradual switch to a ‘capital-lite' business model (relatively speaking) should feed through to the bottom line once the underperforming legacy contracts make their way through the system.