Rising oil prices have been a boon for the FTSE 100. The market was at its lowest ebb since 2016 at the end of March, but then rose to record levels on May 22 – some talked of an increase to 8,000.
Although it has since fallen back, a large part of the FTSE 100’s recent gains can be put down to the performance of its constituent oil companies. In fact, around one-third of it was accounted for by two of them: BP and Royal Dutch Shell.
At the time of writing, Shell is up 29.08% on a year ago and 47.75% on a year prior to that. Go even further back, to 2013, and it’s still up 26.37%. Meanwhile, BP is up 26.24% on a year ago, 50.39% on 2016, and 28.36% on five years ago.
Yet, while higher oil prices have been great news for upstream, E&P companies, the benefits are still to make their way down the supply chain.
Around this time last year, Petrofac’s share price fell off a cliff edge on the back of an investigation by the Serious Fraud Office, dropping as low as 349p from 941p just two months prior. They’ve recovered relatively well since – the share price is up 9.5% in three months. However, looking back to five years ago, they are still down more than half (55.86%).
That may be an extreme example – a one-off event delivered a major blow to its value – but the story isn’t that different at another services company, Weir Group. The company’s shares are up 1.85% in the last three months and down 4.92% on half a decade ago.
Meanwhile, Wood Group is similar, albeit slightly worse on the face of it. Shares are slightly down, 0.12%, on this time last year and 16.83% lower on their position five years ago.
While there are some short-term gains, the long term is, largely speaking, a negative story – with shares in the red for all three businesses over a five-year period. But that could be about to change.
Weir suffered during the oil price decline – particularly its Original Equipment and Oil & Gas divisions. Shares dipped to as allow as 787p on February 2 2016, having previously been as high as 2,757p.
Demand is now starting to stabilise and the long-term investment case shows several positive features. The business has a large presence in emerging markets – accounting for 35% of sales – and a high proportion of aftermarket sales (63%). That said, Weir’s shares trade on an expected price to earnings ratio of around 19.9 for 2018, which suggests growth in revenues and margins at its Oil & Gas division is already being taken into consideration.
Wood Group, by comparison, fared better during the downturn and last year the company announced a potentially transformative deal: its merger with Amec Foster Wheeler.
The maiden results for the combined company bode well. Higher cost savings from the integration plan meant they were better than analysts expected and the company is confident of achieving the £170 million previously planned in cost synergies.
The deal also reduced the enlarged group’s exposure to the oil and gas industry to 52% of revenues and increases its activity in mining and alternative energy. The acquisition also gives Wood a foothold in environment and infrastructure, which opens up opportunities for cross-selling across the group.
Sentiment towards Petrofac has undoubtedly been affected by its failure to partially refinance its bond, which caught many analysts off guard. The company is pressing ahead with the disposal of selected assets, which will generate a significant amount of cash and more than cover the potential bond proceeds. An improved macro backdrop and a healthy pipeline of orders also point to a higher order intake in the next few quarters.
The outlook appears to be positive for these oil services companies – which could be seen as bellwethers for the wider sector. Although there’s a lag between the oil price rise and their performance, we may well see a late-cycle improvement. The benefits of a higher oil price could drip through to them very soon.
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