John Wood Group’s (LSE:WG.) been a top-performing stock on the FTSE 250 over both the past week and month, up 34% and 42%, respectively. Even Darktrace failed to beat it despite shooting up 36% on news of a $5bn buyout deal late last month from US investment firm Thoma Bravo.
The Wood Group share price, on the other hand, gained more by doing the exact opposite – turning down a major buyout offer. The oilfield engineering company turned down a £1.4bn cash offer from Dubai-based rival Sidara last week. In a statement following the rejection, it said the offer “fundamentally undervalued Wood and its future prospects”.
With most UK stocks currently undervalued due to a weakened pound, foreign firms are falling over themselves trying to snap up a cheap deal. Last month, Anglo American turned down an offer from Aussie rival BHP, with rumours of counteroffers from Glencore and Rio Tinto on the cards. Shell, meanwhile, has said it’s open to the idea of a move while BP has previously reassured investors it plans to stay.
Why did Wood turn down the deal?
I’ll be honest, I haven’t been following Wood Group closely as it hasn’t popped up in my newsfeed recently. The share price made some gains in 2023 but is down 56% in the past five years. It’s now down to 195p after peaking at nearly 900p in January 2017. Currently, the price is back at the same level it was almost exactly one year ago when it fell from 219p to 140p in the second week of last May.
A buyout offer doesn’t necessarily mean the company’s doing well, but Sidara must see some value in it. Not that much value though, as its £1.4bn offer only barely exceeds the company’s £1.35bn market-cap. With Wood’s past earnings having declined at an average annual rate of -54%, I’m trying to figure out what prompted the unsolicited offer.
An acceptable balance sheet with mild growth potential
Admittedly, Wood’s revenue is up 8% since last year and analyst consensus expects earnings to grow at a rate of 93.4% a year going forward. It also has a fairly clean balance sheet, with enough equity to cover its debt but a slightly low interest coverage ratio of only 0.8. That could become a problem if operating income doesn’t improve soon.
Overall, it seems to be operating fairly well and could have a promising future. But I would expect a competing firm to base an aggressive buyout offer on something more concrete than that.
The company isn’t doing badly per se but I’m not sure where the high confidence in its future growth comes from. Unless it knows something I don’t, I can’t see a lot of evidence to suggest significant share price growth from here.
I think Wood may have been right to reject the first offer but I expect it will accept a larger counter offer. So while the recent price jump’s impressive, I would wait to see where this goes before expecting any further growth.
For now, I’d rather put my money into a more promising oil stock like Harbour Energy, which has seen 300% earnings growth in the past year and has a 6.9% dividend yield. Now that’s something I can get my teeth into.
