Wood cautious on oil industry revival

Published on Wednesday 26 August 2009 21:44

WOOD Group has warned that a resurgent oil price has not boosted investment in the sector, predicting spending may not gather momentum until late 2010.

The price of oil has virtually doubled from lows hit earlier this year, leading analysts to predict that investment in the sector will return to growth in the second half of this year or early 2010.

But Aberdeen-based Wood – Scotland's largest oil services group – is predicting that investment, in particular in new projects, will continue to slide until at least next year, and probably not rise until the second half.

Chief executive Allister Langlands said that, while spending on existing production remained robust, investment in new projects fell sharply in the first half and is expected to fall further before the end of 2009.

"We think that some time in 2010 that (spending] will pick up. My sense is probably the second half of the year," Langlands said, adding that the first half of 2010 could be lower than the second half of 2009.

While he admitted that the current market would be even more challenging if crude oil was still trading at about $40 a barrel, Langlands said the recent recovery did little to change investment decisions.

"The strength of the oil price has been a pleasant surprise; it's helping our customers' cash flow, but I don't think it's changing their (investment] decisions short term."

Langlands said that if oil remains in the $60-$90 a barrel most analysts expect, it would encourage healthy investment "in the longer term".

Across the industry, Wood Group predicts that spending on exploration and production will fall by 15 per cent this year, although different sectors have seen wide variations in investment.

In the North Sea, the firm's production facilities business showed growth compared to early 2008. However, this was a product of winning four substantial contracts, including operating a floating platform for Venture Production.

Meanwhile, the US gas drilling market, in which Wood has a substantial presence, has shown "a pretty sharp decline" Langlands said, with the number of rigs in operation more than halving in the past year.

The group yesterday reported a 5 per cent fall in revenue to $2.41 billion in the six months to 30 June, although, after stripping out currency movements, revenue rose 7 per cent.

Underlying earnings dropped by $20.2 million to $187.7m, as margins fell by 0.4 per cent to 7.8 per cent. Wood's shares, which have rallied in recent weeks, closed down 5.2 per cent at 308.4p.

Meanwhile, oil explorer Tullow said yesterday it had been inundated with offers to help develop its major Ugandan assets, as it reported an 80 per cent fall in first-half profits.

The London-based group is seeking a partner to develop discoveries containing more than 700 million barrels of oil.

Exploration director Angus McCoss said almost every major mid-steam company had contacted Tullow about the project and it expects to kick off a bid process in the coming weeks.

On a busy day for industry updates, Melrose Resources, the Edinburgh-based oil explorer, reported an 85 per cent fall in first-half profits. The FTSE-250 group made a pre-tax profit of $19.8m (12.2m) in the first six months of the year, compared to $134.2m a year earlier.