John Wood Group: needs polish, but has plenty of potential

Oilfield engineer John Wood’s share price has underperformed, its prospects are solid and it looks too cheap

Like it or not, oil remains a vitally important commodity. While the price has dipped from its highs in the first half of 2022, the International Energy Agency (IEA) still expects global demand for crude oil to grow by 2.2% in 2023, thus topping pre-pandemic levels. Even if this is overoptimistic – the IEA admits that figure could well be lower – global oil usage only tends to drop during deep recessions.

Meanwhile, world oil supply is also uncertain, with concerns over Russia and oil-exporters’ cartel Opec. To cut a long story short, there’s a constant need for oilfield-engineering firms to provide a steady stream of “black gold” for consumers. As and when renewable-energy sources manage to supply most of the world’s energy needs, industry expertise will be vital in ensuring a smooth transition here too.

Enter John Wood Group (LSE: WG), a member of the FTSE 250 mid-cap index and one of the world’s leading consulting and engineering companies. It operates across energy and infrastructure markets, while employing 40,000 professionals across 60 countries. Its consulting division is a global problem-solver that aims to maximise the value of clients’ assets during their life cycles. It focuses on the energy transition and sustainable infrastructure development across a broad spectrum of markets.

Fingers in a wide range of pies

The projects division helps customers with project management, engineering, construction and procurement in sectors including oil and gas, chemicals, renewable energy, power, mining and minerals, and life sciences.

Finally, its operations arm does what it says on the tin, helping to manage businesses in areas ranging from transport and power generation to water and government infrastructure. The division provides maintenance, modifications, brownfield engineering, asset management and (where necessary) decommissioning services.

Given the backdrop of oil’s performance since Russia invaded Ukraine and the subsequent panics about energy supplies, you might have expected a stellar showing from Wood’s stock price in recent months – not least because the group is selling a consulting business, Built Environment (BE), to Canada’s WSP Global for $1.62bn (£1.35bn) in cash, which compares with the group’s current market capitalisation of just over £1bn.

Yet Wood has been a big disappointment for its investors over the last two months. From 250p around the end of May 2022, just before the sale of BE was announced, the group’s shares have plunged to below 150p.

A weak UK stockmarket over this period certainly hasn’t helped. Nor has the group’s delayed announcement of a $136m loss for the year to the end of December 2021 (Wood does its accounting in US dollars, the currency in which crude oil is also priced).

But fears about the possible effects of a near-term economic slowdown have probably done the most damage, even if – as I explain below – these appear unjustified.

Over the longer term, though, Wood has suffered several more problems. For example, in February of this year it raised its expected loss on an anti-missile facility for the US Army Corps of Engineers from $135m to $222m.

Indeed, one-off write-downs have seriously soured sentiment from early 2017. Since then the stock’s value has fallen by more than 80%. Furthermore, dividend payments ceased three years ago.

Clearly, during this period shareholders have experienced plenty of pain. However, that isn’t a problem for new investors. With the group’s long-term outlook improving, the stock-price plunge may be providing new buyers into Wood Group with a great recovery opportunity.

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