Share of the week: Oil gush underpins rally

Competition for top spot has been fierce this week. Miners have been shooting the lights out, driven by rising metal prices, while investors have piled back into oversold banks. Despite this, however, it's Amec Foster Wheeler that gets the nod following a busy few days on the corporate front.

Amec's fortunes are closely tied to the oil industry, so it is perhaps unsurprising that the share price has plummeted about 75% since summer 2014, about the same time oil began its descent from $115 a barrel.

Thankfully, the reverse is true, and a 20% surge in Brent crude since mid-February is more than reflected in Amec market capitalisation. Its shares have rocketed over 40% in that time, and they've rocketed over 29% in the past five days alone.

As well as the resurgent oil market, stronger-than-expected US jobs data on Friday is underpinning a move back toward $40. Already there's talk that OPEC and non-OPEC countries can agree a wider production freeze when they meet in Moscow on 20 March.

Crucially, Amec also completed the refinancing of its main debt facilities this week via a new facility with a syndicate of 20 banks. The plan was first flagged in November when the company issued a profits warning and halved the final dividend. Dividends this year will also be half the figure returned to shareholders in 2014.

In a case of bad timing, Amec paid $3.2 billion (£2.1 billion) for Foster Wheeler in 2014. Designing and building high-tech oil facilities when oil companies are cutting costs is bad for business.

"This gives us substantial headroom and marks another important step towards further strengthening our balance sheet," said finance director Ian McHoul who is also interim CEO after Samir Brikho, the man responsible for buying Foster Wheeler, left abruptly in January.

In addition, Amec has just won a one-year £125 million engineering, procurement and construction (EPC) contract by BP to build a new refrigeration plant at BP's Grangemouth site in Scotland. It will also share in a seven-year $500 million environmental services contract with the US Air Force.

A look at the chart above also clearly shows the large gap down from around 700p following the November warning. Share prices typically try to fill such gaps over time, although there must be some fundamental reason for such a significant sea-change in sentiment.

Full-year results, pencilled in for 10 March, will not be pretty. Investec Securities is looking for full-year pre-tax profit of £319 million in 2015, giving earnings per share (EPS) of 64.2p.

At 468p, the shares trade on less than eight times EPS estimates for 2016 of 59.3p. A forecast dividend 21.7p a share for this year generates a prospective yield of 4.6%, reward for the level of risk involved in Amec right now.

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.