What with President Obama lifting the ban on deep-sea drilling in the Gulf of Mexico and oil giants such as Petrobas boosting production in South America, it looks as though it’s once again full steam ahead for oil-field services. Just look at John Wood Group, the Aberdeen-based energy contractor. Its shares have risen threefold over the past two years, and are now near all-time highs.
On 11 October, Wood reported encouraging third-quarter numbers and said it had bagged a $152m contract with GWF Energy in California to build and commission a gas turbine plant. So does this herald a sustained boom?
Things have undoubtedly picked up over the past year. Wood operates three businesses. Engineering and production comprises 65% of turnover; well support 19%; and Gas Turbine Services 16%. The firm supplies customers such as Shell, Hess and Total with platforms, pumps, valves and pipelines.
In the first half of this year, Wood secured a detailed design contract for Chevron’s Jack and St Malo deep-water facilities in the Gulf of Mexico, along with order extensions in Brunei and Equatorial Guinea, and more work in Australia. Its lack-lustre gas market is also thawing out, which is particularly important since the firm is one of the leaders in American onshore shale.
Turkey of the week: John Wood Group (LSE: WG), rated a BUY by Goldman Sachs
So it’s no wonder the board is bullish – reporting higher bidding volumes, fewer project delays and growing work-in-progress. The business has the advantage of a wide spread of operations located in the North Sea, Australia, West Africa, and the Americas. It has the sort of deep vertical expertise that should continue to be in demand in an energy-hungry world. Longer-term, chief executive Allister Langlands sees openings in offshore wind farms and the introduction of carbon capture and storage schemes, to which the group can transfer relevant specialist skills.
Unfortunately, though, the shares are not cheap. The City is pencilling in 2010 revenues and underlying EPS of £3.1bn and 23.8p respectively, rising to £3.4bn and 28.9p in 2011. That puts the stock on rich p/e multiples of 18 and 15, while paying a meagre 1.6% dividend yield. What’s more, next year’s targets are stretching, especially as they represent a tricky 21% leap in earnings in a tough climate.
I’d value the stock on a through-cycle EBITDA multiple of seven. Adjusting for the $180m of net debt, that gives an intrinsic worth of around 330p a share. So there appears to be more downside than upside potential. If there is a double-dip, profit margins could soften pretty sharpish as in 2009, with players such as Technip, Schlumberger and Alstom scrambling for scarce business. True, Wood could be taken over, yet at these heady levels any deal is difficult to justify on purely economic grounds. A pre-close trading update is scheduled for 16 December.
Recommendation: TAKE PROFITS at 425p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments