Stock In Focus: Can Highly-ranked John Wood Group Deliver?

6th Jan '16 by Roland Head

13 comments 18086 reads

When choosing a company for this week’s Stock in Focus article, I ended up with a short list of two: John Wood Group and Alumasc. So I was interested to see a few hours later that both stocks appeared in Ed Croft’s NAPS portfolio for 2016.

Alumasc is a building engineering stock I’ve followed for several years and may cover next week, but this week I’m going to take a look at Wood Group. I rate this Aberdeen-based firm as the class of the field in the UK-listed oil services sector, and believe it could offer good value.

Is this wise?

After my disastrous foray into commodity-related stocks for this column last year, it may seem rash of me to choose an oil business for my first stock of 2016. But I’m not so sure that’s true. I believe that crunch time is approaching for the oil sector and that casualties -- and perhaps production cuts -- are likely this year.

Macro views aside, I think that Wood Group has now had a chance to show investors how it will cope with lower oil prices. So far I’ve been impressed, as have the Stockopedia computers.

Wood Group currently has a StockRank of 95, with value and quality ranks of 80 or more, suggesting a possible contrarian buy. Crucially, momentum is also improving rapidly. This suggests that now could be a good time to take a fresh look.

The case for value

Oil sceptics will point out that the historic performance of companies operating in the oil sector isn’t necessarily relevant. After all, profits linked to the price of oil are going to take a big hit over the next few years.

That’s certainly true up to a point, but there are limits. Wood Group’s role in the oil sector means that it has two big advantages. Firstly, it doesn’t sell oil. Wood Group provides engineering and operational services which many oil companies need to maintain production. Wood Group also has an asset-light business model and a flexible workforce.

A final consideration is that Wood Group’s forecast P/E valuation is almost identical to its historic P/E. The implies that the market is expecting stable earnings from this firm.

Let's start by looking at why Wood Group has a ValueRank of 88:

(You can see these breakdowns by clicking on…

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bargainvalue

7th Jan '16

I fully agree with you. I have written about Wood Group and in my opinion the company is strong enough to survive even a very harsh times on the oil market. I am happy to see someone, who support my point of view.

Rusty2

It has fallen about 10% in last few days so I think I will watch from the sidelines for now.

bobo

12th Jan '16

Just how low and for how long does Brent need to go before WG runs out of cash. $20 and 6 months? Cutting costs is all very well, but once the contractors are gone, then you need to cut the old/weak/poor performing in the core business then you just end up with a rump.

To put it another way, which company that you can select will buy WG if the share price drops by half, because I can't think of one

Roland Head

bobo,

Your comment seems to suggest that £WG earnings are linked in real time to the price of oil. This isn't the case.

Although the collapse in oil has caused WG's customers to negotiate prices down on new and existing contracts, the firm's business generally operates on multi-year timescales and involves agreed fees for certain work. As a random example, WG announced a new 3-year, $90m contract in Iraq as recently as November.

I'm don't think Wood Group will run out of cash in any reasonably foreseeable scenario. The group has generated plenty of free cash flow over the last eighteen months and has very little debt.

On the subject of acquisitions, who knows? Wood Group has made at least one small acquisition itself recently and I wouldn't be surprised if more followed. There are many companies in a much weaker position than WG.

For what my opinion is worth (not much!) I'd be very surprised if oil reached $20 and stayed there for six months. But even if it does, global oil consumption will remain much the same, and most WG customers will continue to pump and refine most of the oil they are currently pumping and refining.

Regards,

Roland

Thanks Roland, no I'm not suggesting WG earnings linked in that way but I have worked in the industry and when the clients are out of cash they just stop spending on capital equipment and repair budgets fall apart. In this industry the plans move slowly but the cash moves fast... In fact the ability of contracts to slow down cash payments at a whim is a major facet of the business. If a pump does not work at top efficiency, no one cares, if a piece of kit is delivered late no one cares, if a bribe arrives late, everyone cares. I'm sure WG do not operate in a Bribe environment but a lot of the oil industry is like that.

I'm long (in a very small may as part of diversified approach on this share) but i'm also realistic. I can see £20 for 6 months BTW.

My point on aquisitions is who would buy it? I know there are weaker companies but are there stronger ones who can see an advantage in buying it. If not, then I see it bouncing along hopefully making a little cash.

Thanks bobo. I take your point about what happens when cash is tight. I've seen similar things in other industries in the past, too.

Having said that, I would be surprised if WG's business reached the point where it had so few worthwhile contracts that no-one would buy it at any price, but I suppose it's not impossible.

Ultimately I think we (mostly) agree! WG should be able to bump along at the bottom for a while and then hopefully deliver strong results when prices start to rise. I don't see this as an existential risk to the firm thanks to its strong balance sheet and good cash generation.

The companies that will go by the board are those with too much debt and negative cash flow. The big question is how long it will take for this flushing out process to complete.

Cheers,

Roland

agreed

I bought a few John Wood shares today, so they are bound to plummet now, lol. I have a tight stop loss just in case.

whitmad

14th Jan '16

Takeover rumours:

http://www.ft.com/cms/s/0/1c4a4262-ba21-11e5-b151-8e15c9a029fb.html#axzz3xCTHf46X

I can't read that link as I'm not a FT subscriber. The share price has not gone up today. I think after the KBC bid I think John Wood (LON:WG.) does look quite attractive.

vik2001

9th May '16

a lot of big contract wins this year for JW including one today in Iraq.

17th Feb '17

Thought I'd come back and comment on WG performance that finally ended up well north of 850 in December. I guess my opinions were firnly wrong. I finally bought in and enjoyed some fruits of the debate.

It has now drifted down to just over 800 with a report coming out on 21 Feb and Brent roughly $55. Any views on further improvement or leave well (get it) alone?

Tony Drew

19th Mar '23

Any reference to Wood Group drives me to apoplexy. This company has not increased pensions for pre 1997 DB pensioners for the last 20 years resulting in a cut by 50% over the period. They say they can’t afford a rise as they are discretionary but they can for 96% of pensioners who are legally entitled to a inflationary rises.

Stock in Focus: Can highly-ranked John Wood Group deliver?

Is this wise?

The case for value

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Roland Head

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