Wood Group - chill out despite fall on results?

Tom Winnifrith Bearcast - crunching the numbers after today's dire results & profits warning from IQE. Listen HERE

Wood Group (WG.) shares are volatile following its results announcement and are down over 7% as I write. They are still however the thick end of ten percent above the low point for the year...which goes to show you the material natural level of fluctuations in the oil services space. Still, with the oil price heading north again year-to-date I would have expected more especially - as I last recounted HERE - Wood Group has plenty of self-help scope resulting from the Amec Foster Wheeler deal of a little over a year ago.

Highlands Natural Resources moves into the CBD market. Gary Newman reviews HERE

Any deal though has the capability of blurring the short-term numbers. In Wood Group's case the revenue growth line includes a pro forma adjustment, the operating profit line has to be amended by exceptional and non-cash amortisation charges and there is even an overall loss for the period impacted by 'exceptional costs of $183m related to synergy delivery, restructuring, impairment of EthosEnergy and guaranteed minimum pensions'. I get why the purists may not like either the space or the company's numbers. However I do not think any of this has induced the latest share price fall and the company's comment about anticipating more growth in 2019 is clearly helpful too. Certainly ebita (earnings before interest, tax and amortisation) growth is guided to be near 10%. I think the issue lays with deleveraging.

Surface Transforms – placing “following recent investor demand” bullsh*t again? Read HERE

Wood Group has been fairly successful at getting synergies from the deal and this has manifested itself in not just helping drive up the earnings capability but deleveraging too as per the comment that 'Net debt reduced to $1.5bn in line with guidance at December trading update. Total facilities headroom of $1.3bn. Net debt : Adjusted EBITDA reduced to 2.2x (2017: 2.4x)'. All good stuff...however anything above x2 times should induce a raise of the analytical eyebrows. Wood Group knows this too and hence wants to get down to around x1.5 times net debt to ebitda. But the statement indicates this is taking a little more time, hence the comment: 'Deleveraging to 1.5x Net debt to Adjusted EBITDA will be more gradual than originally anticipated due to impact of slower sector recovery in oil & gas since completion, working capital commitments on the legacy AEGIS contract and slower progress on non-core asset disposals due to our focus on value'.

TomCo - damning assessment after latest discounted placing from City's No 1 oil analyst HERE

So far from ideal, more a delay in the plan of action...and so the share takes a hit. For me though this is no huge disaster. A prospective rating of x10 EV/ebit (on clean numbers admittedly), a dividend yield of well over 4% (pushed up in the numbers) and low/mixed hopes already embedded in about the sector outlook is a workable backdrop and I would worry more if some progress has not been made already in a sector well known for being lumpy. Debt is the most pain when you struggle to find self-help capability – and at least Wood Group has this. My guess is that firmer energy sector prices will start to filter through into sector spending too – and certainly recent comments from mega cap integrated names such as ExxonMobil support the view that more sector capex spend is a-coming. Pull it all together, I would buy the share here if you don't own it...and if you have a decent stake like me then chill and write down the circa five quid level to add another slug.

Kingfisher – with the CEO going, all options open up to create more than 'One Kingfisher'. Read more from Chris Bailey HERE

Filed under: Wood Group, WG., Bearcast, IQE, Highlands Natural Resources, Surface Transforms, TomCo, Kingfisher

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