Whittled-down Wood soon to be in better shape

A year into this supply-constrained, high-demand period for oil and gas, Wood Group (WG.) has remained heavily indebted and dividend free. The group reckons its focus on cash generation will bear fruit, though, and the sale of its built environment consulting division for $1.6bn (£1.38bn) should knock off the debt issue. 

Helpfully, its lenders upped their covenants so hitting a net debt-adjusted Ebitda ratio of 4.2 times did not bring the cavalry running at the June measurement date. Wood said the built environments sale cash should come through by the time the covenant goes back to 3.5 times. 

Investors will get a clearer picture of the group under new chief executive (and former chief operating officer) Ken Gilmartin, who took over the top job last month, once its new strategy is released in November.

Gilmartin said his first weeks in the role had come at a time of “improving operational momentum”. “The strong order book gives me confidence for the future but there is a lot more to do on cash generation,” he said. 

The group has already begun a move away from large-scale projects, and this hurt sales for the period, although the operations unit overtook projects to become the biggest contributor in terms of revenue, at $1.2bn. 

The idea behind taking on fewer lump-sum projects is to smooth out revenue and avoid contracts that end up being loss-making. 

That doesn’t mean new deals haven’t come in group-wide – Wood signed a decade-long “engineering and project support” agreement with Chevron (US:CVX), as well an extension with Equinor (NO:EQNR) for work on its North Sea operations. 

In the first half, there was a free cash outflow of $363mn, driven by a $208mn working capital outflow and exceptional costs of $102mn. 

This last figure included $38mn in payments after a Serious Fraud Office probe into 2017 Wood acquisition Amec Foster Wheeler, with another two payments of a similar size to come.

Another regulatory headache that has popped up this year is also around a former Amec project, a chemical plant in Texas. Enterprise Products is after $700mn from Wood, and the group said a trial verdict was expected by year end. A settlement could still be reached, however. 

Analysts are forecasting a small final-year dividend, on earnings per share of 19ȼ, although the consensus has become more pessimistic as the year has gone on, falling from 26ȼ a year ago. While investors aren't feeling the energy rush yet, we stick with our hold call on the basis of the balance sheet improving and massive project losses now hopefully a thing of the past. Hold.