US shale performance saves Wood

Wood Group has shown that it is well-positioned to benefit from America's strong shale gas market, and investors have clearly focused on the positives, welcoming a mixed first-half performance.

Some of Wood Group enjoyed a healthy six months, with group revenue up 10% to $3.8 billion (£2.28 billion). But earnings before interest, tax and amortisation (EBITA) was in line with the same period last year. Earnings per share dipped slightly to 44.4 cents, from 44.5 cents last year.

However management remain confident the company will achieve EBITA growth by the end of the fiscal year, and its interim dividend is up 25% at 8.9 cents.

The oil services company is split into two reporting businesses: Wood Group Engineering and Wood Group Production Services Network (PSN).

Engineering suffered from a lower upstream (exploration and production) contribution, with EBITA falling 9%. Good downstream (refining and marketing) performance, as well as subsea and pipelines partially offset this deficit. Engineering EBITA is not expected to grow this year.

PSN bolted ahead, with EBITA growth of just under 50% thanks to a good US Shale performance, which is now the largest contributing region to PSN's EBITA. North Sea contract renewals and a multi-year award in Malaysia auger well for the future. But Wood Group's turbine activities' just about broke even. The losses on the Dorad contract are expected to be recovered in the second half, improving the balance sheet.

Although Wood Group's share price is down from its highs of over 900p a year ago, investors liked Tuesday's update, pushing it to 788p, over double its share price five years ago.

But is now the right to invest in the company?

Investec seems to think so, with a target price of 825p. Even though engineering margins are weaker than expected, recent acquisition should support the EBITA.

"Despite weak sector sentiment, the upside to our unchanged target price is starting to look more compelling."

Thanks to the recent acquisition of Norwegian-based engineer Agility Projects, Investec's 2014/2015 EPS guidance is set at $1.04/1.11, giving a price/earnings multiple of 11 times.

"This is a 3% discount to the sector (12.0 times) and 10% discount to our target multiple (13.0 times). The recent slide in the share price implies reasonable upside to our 825p target price. Including Wood Group's dividend yield, it implies a total return of around 13%."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.