Services firms may lose lustre as end of oil and gas boom may be in sight

Published on Sunday 24 August 2008 21:33

FEARS that the current oil and gas boom has peaked are this week set to cast a pall over the results of services companies in the sector, including Footsie 100 member Wood Group.

The Aberdeen-based oil and gas services giant is tomorrow expected to reveal strong figures for the half year, which will set the tone for a string of oil services companies due to report this week.

But while analysts such as Cazenove point to strong earnings growth of 43 per cent for Wood Group in the first half, others suggest faltering oil prices make stocks in oil services companies less attractive.

"Recent oil price weakness has sparked fears that the services cycle may prove shorter than expected," said Credit Suisse analysts. "This, combined with general equities selling pressure, has driven our UK oil services universe down 12 per cent this year to date."

According to Credit Suisse, Wood Group was the "worst performing" stock in its "universe" of UK oilfield service firms, which includes Wellstream, Petrofac and Acergy. Wood's share price, which closed on Friday at 446.75p, is down from its one-year high of 503.25p in July.

High gas prices benefit all aspects of Wood's business. Demand for its core on- and offshore engineering and production division is still high as its clients race to get oil out of the ground, driving up the prices Wood can charge.

However, lower gas prices and the effects of the credit crunch have the potential to dampen the ability of exploration and production companies to invest, warned Credit Suisse, which is taking a "neutral" stance on Wood Group's stock. Others take a different view with Oriel Secutirities putting a "buy" rating on Wood Group's shares. Its analysts said that while it is "difficult to envisage many disappointments" in the sector, they fear the rate of growth is slowing and may even hit the second half of the year.

Wood Group's fall in share price from July however, they said, was "overdone".

Acknowledging that oil price remains the most important driver of sentiment for the sector, bullish Cazenove analysts said they believed Wood Group in particular would carry on wowing the City, even into the second half of the year.

They said: "Based on the volatile and unpredictable recent swings in the share price for oilfield services stocks, it is hard to call the end to the sell- off of the sector.

"However, fundamentally the sector looks strong as ever and we are confident that we will continue to see positive consensus earnings revisions in the second half of 2008."

Analysts at Evolution Securities are forecasting first-half profit before tax of $180 million (97m), a 37 per cent increase year on year.

Wood Group is the first UK oil and gas services company to bring out its interim results. Petrofac will report on Wednesday, while Amec, Hunting and Wellstream all report on Thursday. Lamprell will reveal its interim results on Friday.