It’s been a colourful and action-packed time in oil and gas. The ongoing saga between Tullow Oil and the Ugandan government over tax continues to raise eyebrows while Cairn’s oil discovery in Greenland has caused a stir. Then there’s the prospect of the largest share deal yet – the $67billion equity issue by Petrobras in Brazil.
But from an investor’s perspective, the most notable industry news has surely been the excellent results reported by oil services companies Petrofac and Amec.
Petrofac kicked off the first-half results’ season for oil service companies in the FTSE 350 and did not disappoint. Once again, its engineering and construction sector led the better-than-expected reported earnings.
Petrofac is doing an excellent job of converting the record backlog at year-end 2009 into profitable activity while also making a fine effort to replace that backlog – the second stage of a $4billion contract with Turkmengas in Turkmenistan, Central Asia, is likely to be signed later this year.
The company also won its first contract in Iraq and believes that its expertise in fixed-price contracting will be attractive for the international oil companies given the nature of the agreements signed.
Trading conditions in the remainder of the portfolio remain tough, but Petrofac’s contract wins in the North Sea last year helped raise profits in its offshore engineering and operations division. The company also has high hopes for its first production enhancement contract with Petron, marking its first involvement in Romania.
The outlook statement was, not surprisingly strong. While the “story” is no longer new, we would argue that with its main operating base in close proximity to over $35billion of new projects over the next two years in the Middle East alone, Petrofac has good prospects for the future.
First-half results from Amec were also better than expected with strong growth in organic revenue. In addition, operating profit was healthier than forecast and the company is confident of beating its 2010 margin target under its “Operation Excellence” programme. Amec’s order book is strong and the composition is particularly attractive with a bias towards higher margin capex operations.
The first half is seasonally a weaker one for Amec’s natural resources division but a stronger Canadian dollar, combined with an up tick in investment in oil tar sands in Alberta, gave the division an added boost.
Amec is also benefiting from an extension of engineering capability following a couple of bolt-on acquisitions made last year. Moreover, with the order book up 5%, the second half will be strong in management’s view.
Interestingly, the restructuring of its power and process division is progressing nicely and the focus on nuclear is paying off with four new contracts signed during the period. Renewable energy is another area for growth, further reducing the influence of the old, loss-making legacy contracts.
In comparison with Petrofac and Amec, Wood Group hasn’t been bucking the trend with its first-half earnings down on the previous year. However, this was largely due to a difficult comparison with last year when the company was still benefiting from the delivery of some large projects from its engineering and production facilities division.
The replacement of higher margin engineering contracts with lower-margin service contracts was a further factor. But, with oil prices now showing more stability at higher levels, the level of inquiries has picked up and Wood Group is forecasting a much healthier order book in 2011.
The situation would have been much worse had the well support division not seen strong demand for electronic submersible pumps for deep offshore drilling projects across the globe. The surge in demand for unconventional gas drilling also helped push the operating margin of the division to a new record high of 11.9%.
Interest in Wood Group’s shares started to increase after the half-year trading update. While this has been one of the least preferred oil service companies on the market, the valuation was attractive, provided that the company could turn the increased level of inquiries into orders.
Mark McCue is a divisional director with investment management and financial planning specialists Brewin Dolphin.
Past performance of shares is not a guide to future performance. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.
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