Profits jump, but Wood Group now hunkering down

Published on Tuesday 3 March 2009 20:44

WOOD Group reported a 48 per cent rise in profits yesterday, but revealed it had embarked on a wide-ranging cost-cutting plan to counter an expected fall in demand across the oil industry.

Figures published yesterday showed that pre-tax profits at the oil services giant hit a record $384.1 million (273.1m) in 2008, on revenue of $5.24 billion, as investment in the sector soared on the back of last year's record crude prices.

But the Aberdeen-based group yesterday disclosed that it was already taking action to prepare for the expected downturn in the oil industry across the globe. As a first step, it had moved to cut its own – and its customers' – costs to mitigate the impact of a fall in commodity prices.

Chairman Sir Ian Wood, whose father founded the company, said the oil services firm had cut the rates it pays self-employed contractors by 10 per cent this year, and would seek to pull back costs further.

Sir Ian said call-out rates for contractors had risen by 40-50 per cent in the past four years, and that a fall in demand made it "perfectly reasonable and perfectly legitimate" to pull back rates as demand fell. He said there was "no point hiding" from a fall in demand.

Sir Ian promised that the company would seek to strip out further costs paid to contractors.

He explained: "That will depend on supply and demand over the next 12 to 18 months … but we will look to take down rates further where we can."

Sir Ian added: "We have a lot of sympathy for our customers. There's been huge inflation over the last three or four years in the supply chain."

The group said there had been a company-wide pay freeze. Chief executive Allister Langlands yesterday explained that in some areas the group's own costs – areas such as buying metal – had fallen, giving it additional scope to pass cost cuts on to customers.

Analysts expect Wood Group's profits could fall by up to 20 per cent in 2009. Sir Ian said the firm remained well positioned, with management experienced in the sector's cycles.

Wood Group is expecting that overall spend on oil exploration and production will fall by up to 15 per cent in 2009, but claims its customers, predominantly large international companies, are cutting spending by less than smaller rivals.

"The big guys are playing the long game this year," Sir Ian said yesterday. "They're not reducing their capital expenditure by anything like that, and we're much more weighted towards the bigger end of the market."

The company, which provides oil services across the world, said it was in talks with several companies for bolt-on acquisitions, after it recently renegotiated its $1 billion debt facilities through to 2012, giving it close to $800m firepower for expansion.

As well is developing its technology Sir Ian said the company would like to expand in the Middle East, Africa and Asia-Pacific regions.

Typically, the group makes several acquisitions a year worth $50m or less "and we're currently in conversations with a number of companies about possible deals of that size", he said.