Interactive Investor

Lamprell man buys as profits double

19th March 2015 13:51

Harriet Mann from interactive investor

Lamprell returned to profit last year after a string of profit warnings in 2012 left the oil services company a pale shadow of its former self. Now, in 2014, the firm has generated record profits on flat sales and the shares bounced sharply from recent lows.

Chairman John Kennedy, who took over the role amid the chaos of 2012, has jumped at the chance to boost his holding, buying £18,700 worth of shares on Thursday. He'd already bought a slug of stock in January with other directors. Although annual sales were flat at just over $1 billion, the oil rig firm doubled underlying operating profit to $109 million and diluted earnings per share is up nearly three-fold at 37.4 cents.

The acting CFO has warned that this impressive margin may not be sustainable, but bullish industry expert Malcolm Graham-Wood reckons he is being cautious. "What can only be described as a cracking set of figures from Lamprell this morning as 2014 smashed the whisper and beat every target in the book," commented Graham-Wood. "This is truly a landmark for Lamprell in every way. Behind all this is the new strategy which encompasses a better commercial performance including a much better focus on biddable projects and savings on procurement and factory efficiency, aided by some very smart new kit."

Cost of sales fell from $952 million to $902 million and cash at the end of the year stood at $272.6 million after a rights issue raised $120 million.

Management are pinning the "exceptional" results on robust operational performance, successful phasing of project cycles and savings made from improvements to its productivity. Operationally, Lamprell knocked it out of the park, delivering nine major projects in just 12 months, a group record. Another three rigs were taken to its largest client National Drilling Company and a record-breaking utilities and quarters deck was delivered to Nexen and now holds a spot in the Guinness World Book of Records. With a backlog of $1.2 billion and a pipeline worth around $5.2 billion, investors have a pretty good idea of what the year ahead holds, a positive in the current market.

Management boast that this performance has been achieved just two years after the challenges of 2012 wiped nearly 80% of the company’s market cap. And they have a point. Then, Lamprell was handed a £2.4 million fine from the UK Financial Services Authority (now the Financial Conduct Authority) for failing to warn the market soon enough about late-running or over-budget projects.

However, the slump in oil prices has caused many exploration and production companies to slash capex budgets. As the number of oil projects shrinks, so will the demand for rigs. So, Lamprell's focus has to be on the conversion of its bid pipeline and the delivery of the six mew jack-up rig orders, pipe-rack module produce and minor refurbishment projects.

"The sharp market deterioration at the end of the year has brought significant uncertainty around 2015," it says. "Our business has a certain degree of flexibility built in and we will look to mitigate the impact on Lamprell but pressure on margins and the inevitable slowdown is likely to affect everyone."

It's doubtful the market expected these results as the oil market bear run has knocked over a third off Lamprell's value. Rallying by 11%, the shares are trading at 113p, putting the shares on 9 times forward earnings, a discount to the sector.

Peer Hunting trades on 14 times forward earnings, Wood Group trades on a multiple of 11 and Petrofac 10 times. Next year isn't going to be easy for anyone in the oil space, but there is a lot of bad news already in the price and directors are certainly putting their money where their mouth is.

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.