John Wood Group (LON:WG) - Off to a Flyer

With the average price of oil during 2009 60% lower than it was in 2008, it was no great shock that capital expenditure across the oil and gas industry during the year fell by 15%. The situation now is somewhat different. The price of oil has strengthened and confidence is returning to the industry. Good news then for energy focused support services group John Wood Group (LON:WG.) .

Looking at Wood’s share price performance so far this year it is clear that investors are tuning in to the companies ability to add new contracts and renew existing arrangements. 5 weeks ago the company released full year results which provided plenty of cause for optimism. The group’s year on year fall in revenue was just 6% with revenue coming in at US$4.9 billion. Underlying earnings fell by 19% aided by a fall in the EBITA margin from 8.4% in 2008 to 7.3% in 2009. Nevertheless, given the economic backdrop these results were relatively resilient.

 

 

So what will 2010 look like for John Wood Group?

A lot of course depends on oil. In 2010 alone oil demand is set to make up the falls it has experienced in both 2009 and 2008. The International Energy Agency (IEA) has also recently been increasing predictions for demand on the back of emerging market growth showing that the oil price has solid underpinnings.

The oil price recently surged past US$87 per barrel– putting the price of the commodity at an 18 month high – and a return to triple digits is gathering momentum. Doubters may say that there is spare capacity at the present time however if the market believes this will rapidly disappear in the future, oil prices may nevertheless still rise.

The most pivotal business division for Wood is its Engineering and Production Facilities (E&PF) which provided around two thirds of revenue and underlying earnings last year. Whilst the division’s revenue remained stable, earnings fell because of a contraction in margins. This is because the high margin development related activities were cut back by clients as they were less confident pursuing new oil projects would be worthwhile. However, with a buoyant oil price development spending look set to recover helping to boost profits for Wood Group.

The other two divisions are Well Support and Gas Turbine Services. Well Support focuses on oil and gas reservoirs in order to enhance production rates and economic recovery - clearly a critical service for clients, the unit had the highest EBITA margin of all the divisions. Gas Turbine Services meanwhile is also poised for long term growth with gas the greenest of the fossil fuels for power generation.

Overall, looking at the long term earnings picture for John Wood group, all is well. The group’s focus on expanding the group’s international reach and broadening the range of services provided will in our view underpin robust share price performance. Whilst management will ramp up the company’s positions in the Middle East, Africa and Asia Pacific, the group is developing capabilities in renewables and CO2 handling as well as further technologies for offshore and US shale.