Wood Group shares surge after earnings outpace oil services peers

Updated 1052 AM

Shares of John Wood Group Plc., one of the UK’s largest providers of services to the embattled oil exploration and production sector, soared more than 9%, after it reported stronger-than-expected full-year profit.

In results that are widely regarded as a gauge of mid-cap oil-firm fortunes,  the UK’s second-largest listed oil services company said pre-tax profit rose to $424.2m from $412.3m a year earlier, compared to the most recent consensus forecast compiled by Thomson Reuters of $414.5m.

Revenue in Wood Group’s full year, that ended on 31st December, rose 7.8% to $7.62bn.

Revenue was comfortably ahead of the average analyst forecast of $7.426bn.

The balance for the market might well have been decided by Wood also striking an optimistic tone on the key watch points of dividend—which it intends to increase by double digits, having raised the pay-out for the current year by 25%—and costs, from which WG expects to slice a further $30m in 2015.

As one of my 2015 full-year picks, Wood Group’s relative outperformance of its downtrodden peers in its full year is no less welcome despite having been regarded as likely, due to strength in the key areas below:

• Cost management—relatively asset-light with good momentum on cuts
• Strength of balance sheet— total debt-to-total capital just 2.6 percentage points outside the 1st quartile of UK/Europe peers at 16.3% (peer group average more than 50% higher)
• Protected order book—due to range of longer-term contracts which mandate reimbursement of any cost overruns
• Sustained dividend increases—after the 25% rise this year market forecasts suggest an increase of at least as much
• Robust business segments—above market expectations EBITA at key engineering division
• Stronger-than-forecast EBITA at Wood Group PSN Production Services (its decommissioning business) +30.4%, fuelled by shale clients

• Profit from continuing operations on equity-accounting basis before tax and one-offs +10.9% at $414.5m

Upside momentum skirts limits

Still, after a 25% rebound by the shares since mid-January to Monday’s close, traders may be highly tempted to take profits in the face of still only “relative resilience in a challenging market” as Wood Group states.

Two trading systems I’ve attached to the chart of John Wood Group Daily Funded Trade within City Index’s ATPro platform reflect my view of the stock as a short-term sell, despite positive sentiment, at least on a 30-minute basis.

Whilst the blue ‘fast line’ component of the (MACD) Fast Line/Zero Cross system is safely clear of the zero boundary at present, the theoretically ‘unbounded’ MACD system looks suspiciously close to nominal outer limits.

(This trading system emits signals–blue arrows for ‘buy’, or red for ‘sell’–based solely on its strict adherence to the ‘zero-crossings’ aspect of the MACD concept).

Further indications can be found in the Slow Stochastic Oscillator Reversal Cross System.

Here we see the slower Stochastic moving average line re-entered ‘overbought territory’ this morning, and the other inverted upwards, suggesting it might follow.

Both lines subsequently swerved with the faster pointing lower and the other aligned closely to the balance marker.

However, the system also warned short-sellers to ‘exit’ (note the red flag) a little earlier this morning.

The risks still seem to favour a medium-term retracement although the picture is a finely balanced at present.

Over the longer-term however, for those seeking sensible exposure to the latent recovery scenario in the crude oil industry, from the UK services side, Wood Group Plc. remains the best of the bunch, in my opinion.