Amec Foster Wheeler – Down 26%

5th Nov '15 by Mark Carter

6 comments 6609 reads

Oil services company Amec Foster Wheeler released its H1 trading statement today, sending the results down 26%.

There actually looked to be a triple bottom on the charts at 700p, which is often taken as strong support. However, it did not hold. Technical analysis is not perfect.

It shouldn’t be a surprise to many that oil is in the doldrums. I took a look at their finals over on Sharelock, and immediately thought to myself “that looks like a lot of debt”. Sure enough, Stockopedia lists AMFW as an Altman Z-Score candidate.

If only people had set stop-losses. AMFW reached a high of c 1260p in 2014. If you’d set a 20% stop-loss, you’d be out at c1000p, well above the current price. The price did bounce heavily in early 2015 from c800p to close to 100p, but it petered out.

In some ways, this company reminds me of Chemring, a company that built itself up, had a lot of debt, but then went nowhere when its markets declined.

There could still be a bounce in AMFW, but it would require more skill than me to make a decent go of it.

A lot depends on where oil prices go, of course. Answers on a postcard on that one, please.

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Ramridge

5th Nov '15

Hi Mark - I was tempted to buy some @575 until I put some numbers together.
Taking the markers PE=11 and FY14 EPS = 73.6p, I calculate as follows.
- sp of 575p will support forward eps of 52, which is 70% of current forecast
- on the other hand, if we assume forward eps drops by 50% to 36.8, it will support a sp of 405p

Based on these rough estimates, the current drop doesn't look that attractive. SP will need to drop to below 480p before I would consider investing or taking a punt.

All IMO and please DYOR

Mark Carter

Perhaps I'm too harsh on the whole stop-loss thing.

It looks as though they made a massive mistake in 2014. Their cash position seemed to be OK up until then, but they issued a lot of debt to make an acquisition. Just in time for what appears to be a cyclical top.

Unfortunately, it looks like their cashflow has evaporated. The debt still stays, of course. It will be interesting to see what happens on that front. "Year-end net debt was £1.1b", Net cashflows were £143m for last year. We can be confident that this year's will be much lower. It has a lot of debt to service.

I think this one is quite risky. PE of 10.8 is "low", but with the amount of debt it's got, I'd be nervous.

It's all about the oil price.

Good luck with whatever people decide.

TangoDoc

One thing that we can be fairly sure of is that, whatever the short term situation, the value of oil will continue to rise as a general principle, all the faster as the third world becomes more demanding. All of life goes in swings to and fro; it's in its nature. As China slows -and that is only to a growth we'd love to have here- the demand for oil falls. Once upon a time, Opec was canny enough to manage supply to match demand and keep us paying through the nose. Now it seems that the Saudi policy of pumping out oil regardless of their own losses is more to do with wanting to upset Iran, the USA has gone fracking nuts (though may live to regret that) and who knows how Russia fits in. One thing is certain: the world continues its love affair with the car, the aeroplane, plastics and war. It will only be a matter of time before the pendulum swings back.

6th Nov '15

Yes, I think that ultimately the price of oil has to rise (in real terms).

The basic economic argument is this: long term , marginal revenues will equal marginal costs. Costs are expected to increase - they have to - as the oil becomes scarcer and supplies dwindle.

I'm not into the whole alternative energy bandwagon, as they have high costs, but at some point those costs will be justified by the cost of oil. We have had a foretaste of that over the last year, where fracking became viable, but then collapsed due to the willingness of the arabs to keep pumping out oil at low price.

I'm wondering if the arabs really know what they are doing. Sure, they can "shake out" the alternative energy producers, but they do so at a cost to themselves: they have to sell cheap. Inevitably, their own reserves must dwindle, pushing the price up again, and making the alternatives producers viable again.

So, I don't really see the point of what the arabs are doing. At best, it seems like a costly delaying tactic.

AMFW now has a 6month relative strength of -32.2%, putting it in the bottom decile. That is dangerous territory.

I think we also have to largely the forward PE and come up with our own estimates, I think analysts will have to reduce their projections significantly.

I also see that the company qualifies for the short screens Z-Score and earnings downgrade. I'd say the last thing you want when your finances are looking shaky is an earnings downgrade.

This seems like quite a high risk share.

Best of luck with whatever anyone decides.

cig

The big middle east producers have like a century or so of reserves at the current production rate. They cannot possibly be exhausted in the lifetime of current decision makers, even if they say double production and keep it there for a couple of decades. On the other hand, many Western producers are highly leveraged and cash flow constrained and cannot survive even say 5 years of cheap oil without a whole round of bankruptcies and restructurings, after which there will be very little investment for at least an entire business cycle.

As for alternative energy having high cost, yes, today, but would you be interested in betting that they never reach parity, say in the next twenty years? It's not unthinkable, even without the politics giving it a push through carbon taxation. Oil as a fuel is already only competitive for transport applications today, so the hurdle to obsolescence is lower than for other fossil fuels. It will still be useful for plastics and fertiliser, etc, but that only consumes a small fraction of current output. If it happens, the current price might not look that cheap...

Amec Foster Wheeler – down 26%

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Mark Carter

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