WOOD Group has underlined how grim conditions are in the North Sea as it noted signs of recovery off the US but failed to hold out any prospect of an improvement in UK waters.
The Aberdeen-based giant, which helps build and maintain oil and gas facilities, said the operating environment remains “very challenging” in the North Sea where services firms are facing cuts in workloads and pressure to reduce prices.
The comments in a trading update provide further evidence of the way in which cuts in spending by oil and gas firms in response to the crude price plunge are inflicting pain across the industry supply chain.
Wood has shed more than 2,000 jobs in the UK since the oil price started tumbling in June 2014.
Led by chief executive Robin Watson, the company said it had achieved significant overhead cost savings from reorganisation, delayering and back office rationalisation.
The tone of the update makes clear that the partial recovery in crude prices, to around $50 per barrel from $27/bbl, in January has not brought any relief to the North Sea industry.
In May, Wood said the pressure on profit margins in the North Sea was intensifying. The crude price has risen by around $7/bbl since then, after taking account of a fall of around $1/bbl following last week’s Brexit vote.
Given the size of Wood Group, the update will heighten concern about the prospects for the key oil services sector in Scotland. This includes a large number of relatively small firms.
Last month a report by Bank of Scotland found nearly one in three of the UK's oil and gas firms were planning further job cuts this year.
Many had complained about skills shortages during the long boom in investment in the North Sea recorded during a period in which strong demand in places such as China meant oil traded at $100/bbl plus.
Wood has also been hit by the decline in activity in US shale areas, where many new fields were brought onstream during the boom. This ended when increases in production started to run ahead of flagging demand as growth in China slowed and the Opec producers body decided not to play its customary role of supporting prices.
Wood noted the impact of pricing and volume pressure in its US onshore business.
However, conditions appear to be better offshore the US.
The company said: “Looking further ahead, we are seeing some early signs of our customers beginning to assess future projects.” The company said it feels well positioned for engineering and detailed design work on new facilities that may come to market in the US.
Wood continues to see the Middle East as an area of future growth. The company has won business in Iraq in recent months.
Such successes may encourage Wood to shift investment from the North Sea to more promising overseas markets.
The company has been diversifying in response to the crude price slump, by investing in markets such as refining and automotive engineering.
Such moves appear to have had little impact on earnings so far.
Wood Group said it still expects that full year earnings will be 20 per cent down on last year’s $470m, before interest, tax and amortisation.
However, the group reckons its range of activities leaves it well positioned to cope in the current environment and to benefit when market conditions recover.
“Our strong balance sheet and committed long term financing allows us to reinvest in the business through acquisition and organic investment,” said Wood. “Our intention remains to increase the dividend per share by a double digit percentage for 2016.”
Asked about the implications of last week’s Brexit vote for the industry, Wood said it does not comment on political issues.
A spokesman noted that Wood generated less than 0.5 per cent of last year’s $5.8bn revenues on the continent.
Analysts at Exane BNP Paribas said the trading update included positive hints that conditions are improving in areas such as the Gulf of Mexico.
They added: “North Sea difficulties go beyond just a margin reset: unpredictable customer behaviour has impacted employee utilisation (hurting margins) and maintenance delays have hit the top-line. As activity stabilises, there is the potential for North Sea margins to actually recover next year, even in the absence of improved activity.”
Shares in Wood Group closed up 17p at 687.5p.
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