Wood Group has cut costs but cannot alter a risky market

Even after losing 5,000 staff, the services firm will find it difficult to profit as the price of oil slumps

Oil services company Wood Group has moved quickly to protect its profits from the drastic slump in oil prices by cutting about 5,000 staff – slightly more than 10pc of its workforce. Management are confident they can hit targets for the full year and maintain dividend payments but Questor is not so sure and retains a sell rating.

Oil slump hits profits

1 The Aberdeen-based company, which provides the plumbing that keeps the oil and gas industry flowing, said that pre-tax profits had fallen more than 30pc to $160.6m (£102.6m) in the six months to the end of June, from $233.3m a year earlier. Revenue in the first-half was down $567m to $2.66bn compared with the same period last year. Bob Keiller, chief executive, said that conditions in the oil and gas market remain “very challenging”.

He added: “With little prospect of short-term improvement in market conditions, we will focus on remaining competitive and protecting our capability, working with clients to reduce their overall costs, increase efficiency and safely improve performance.”

Cutting costs

2 Mr Keiller said that during the first half Wood Group had cut about $40m from its costs and was on target to make savings of $80m by the year end.

The price of Brent crude, a global benchmark for oil, fell 0.6pc yesterday to $48 per barrel, less than half the $115 it sold for in June last year.

The FTSE 250-listed company is split into three divisions. Its engineering division, which provides services for deepwater platforms, subsea pipelines and production support and enhancement for mature oilfields, contributes about 37pc of group profits.

With profits down 6.5pc on revenue 11pc lower, this business wasn’t hit as hard by the oil price crash as some other units. This was because it supports existing rigs producing oil – it’s the new rigs and projects that have been hit hardest as energy companies slashed investment in new facilities.

Contributing about half of group profits is Wood Group PSN, which is heavily focused on the shale industry in North America. This unit suffered the most as the lower oil price has all but ended new shale drilling, as it is a more expensive way of producing oil. Revenue in this division was down 22pc and profits were 18pc lower.

The third division is Wood Group’s turbine business which provides and maintains powerplants for the energy industry. Profits here were fairly stable before adjustments on revenue down by a quarter.

Risky outlook

3 Market consensus is for full-year profits of $352m to the end of December, from $475m last year. Questor is concerned that with the oil price still falling, that target may come under pressure. We warned investors to sell the shares at 660p in February as the oil price tumbled and reiterated that advice at 674p in June.

The shares have since fallen 16pc and now trade on 11 times forecast earnings and Questor remains negative. Sell. SOCIAL housing and care provider Mears said its pre-tax profits had increased 3pc in the first half and that steady update sent shares up almost 4pc yesterday.

Mears maintains social housing for local authorities and registered social landlords. The company has a fleet of vans and workmen who fit kitchens, fix boilers and generally keep council housing serviceable. It also provides personal care in homes on behalf of local authorities. Social housing generates 83pc of group revenue and care services represents the balance.

Local authority housing budgets which support the Mears business are now in a far better state after social housing rents have been allowed to rise to the market rate in many areas. David Miles, chief executive, said that housing budgets are now in surplus for the first time in years at many local authorities.

The care business is having a more difficult time and has not delivered the rapid growth that was expected. Mr Miles yesterday attacked government reforms to social care funding, saying the idea of free care for all had been “kicked into the long grass”.

The care business delivers a higher profit margin than the property maintenance unit, reporting revenue flat at £63m and operating profit down 41pc to £2.9m in the first half from £4.9m at the same stage last year.

The care business faces another problem in the shape of rising costs next year from changes to the national minimum wage. Mr Miles said many social care contracts are short-term and can absorb the rising costs as they come up for renegotiation. However, he warned it would weigh on the divisions next year.

Mears’ reported revenue was largely flat at £430m and pre-tax profits rose 5pc to £14.7m. Market consensus is for full-year pre-tax profits of £37m, on revenue of £916m, giving 28p in earnings per share.

The shares have retreated from record highs at 540p last year and have fallen 16pc in the past 12 months. They trade on a forecast price-earnings ratio of 14 times, falling to 11 times next year.

With steady work flow and the bulk of the social housing business well supported, Mears looks like it could have a bit further to run and Questor retains a hold for the rising dividend.