Oilfield services play Wood Group (LSE: WG) has been splashed across the financial pages in recent days.
The engineer hit the newswires on Monday, when it announced plans to acquire industry rival Amec Foster Wheeler (LSE: AMEC) for £2.2bn. According to Wood Group chairman Ian Marchant, the deal will be a “transformational transaction,” and will create “a global leader in project, engineering and technical services delivery across a range of industrial sectors.”
The deal will enable Wood Group to lessen its reliance upon the fossil fuel segment, the new entity’s operations will be “diversified across the oil & gas, chemicals, renewables, environment & infrastructure and mining segments.”
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On top of this, the combined group will also benefit to the tune of £110m from cost synergies, Wood Group said.
Big dog
And Wood Group made the papers again on Tuesday, after announcing that it had secured two separate contracts related to BP’s ‘Mad Dog 2’ deepwater asset in the Gulf of Mexico.
The engineer signed an $80m contract with Samsung Heavy Industries to provide engineering and procurement services for the topsides for BP’s Mad Dog Phase 2 floating production unit.
Furthermore, as part of Wood Group’s global services agreement with BP, the firm was awarded a $4.89m contract for subsea engineering and project management services to the offshore project.
Fossil fears
Whilst offering Wood Group a chance to enjoy multiple revenue streams, there is no guarantee that this week’s touted tie-up with Amec Foster Wheeler will prove a long-term solution to rampant profits growth as the oil market heaves with oversupply.
Indeed, Amec Foster Wheeler reported this week that revenues slumped 8% in 2016, to £5.4bn, as ongoing weakness in the fossil fuel sector offset strength in its solar and environment & infrastructure operations.
Frightening fundamentals
Concerns about the crude market’s supply and demand imbalance persisting long into the future could continue to hamper capital expenditure across the oil industry, and with it demand for the new company’s services.
Signs that output from US shale producers is about to spurt higher, allied with a steady build-up of North American crude stockpiles, has seen Brent slide back towards the $50 per barrel marker in recent days.
This situation clearly bodes badly for oil giants like Royal Dutch Shell (LSE: RDSB), whose hopes of a healthy earnings bounce-back are built on major producing nations keeping the taps turned down, in tandem with OPEC’s production freeze.
Last week, Shell’s ongoing divestment scheme saw it hive off some of its Canadian oil sands assets for a total of $7.3bn. Whilst essential in rebuilding its balance sheet, and thus financing bumper dividends, the business obviously needs a solid uptick in crude values to mend its stretched finances and reap the benefits of its blockbuster BG Group tie-up, too.
But this situation appears a world away, as the market remains swamped with unwanted material. And I don’t believe that Shell’s forward P/E ratio of 15.2 times or like Wood Group’s corresponding multiple of 15.6 times reflect either company’s still high-risk profiles.
I reckon cautious investors should give both stocks some distance right now.
