John Wood Group PLC Inks Major Deal With BP plc

Today’s update from Wood Group (LSE: WG) is highly encouraging and, as a result, its share price has been up by as much as 4.3%. Making the headlines is a major deal for the company that has been signed with BP (LSE: BP) (NYSE: BP.US) and is worth $750 million over a period of five years. The contract is for engineering, procurement and construction services in Grangemouth, Scotland and is Wood Group’s largest contract of 2014, with it also including an option for two, one-year extensions.

Looking ahead, Wood Group has confirmed that it expects full year 2014 performance to be in line with expectations and ahead of that reported for 2013. Encouragingly, the company now expects its Engineering division (which is its second largest division) to beat the guidance provided in December 2013, when it stated that EBITA would fall by around 15% in 2014.

Furthermore, this weakness is set to be offset by its Production Services division and, looking ahead to 2015, Wood Group anticipates that its largely reimbursable order book, balance of opex and capex, as well as range of longer term, diverse contracts will mean that it performs better than many of its peers.

A Challenging Sector

Clearly, the falling oil price is dragging down the profitability of a range of oil sector stocks, with BP being an obvious example. Its bottom line is due to fall by 47% in the current year, and by a further 6% next year. In addition, with Russian sanctions arguably yet to fully bite and the fallout from the Deepwater Horizon oil spill not completed, the short to medium term could prove to be a tough one for BP. That’s why Wood Group’s relative resilience could prove to be a major asset for the company and its investors in 2015.

A Standout Stock?

Looking at the investment case for Wood Group and BP, both stocks have obvious appeal. While BP is enduring a highly challenging period, its shares offer superb value for money and a highly appealing and sustainable yield. For example, BP trades on a price to earnings (P/E) ratio of just 9.5 and yields 6.1%, with dividends being covered 1.7 times by profit.

Meanwhile, Wood Group is forecast to increase its bottom line by 25% in 2014, and follow this with growth of 4% next year. Despite its hugely superior growth forecasts, though, Wood Group trades on a comparable P/E ratio to BP, with its shares having a rating of just 9.3. Although its yield of 3% is less than half that of BP, its payout ratio of just 28% indicates that dividend rises could be on the cards.

So, with greater resilience than BP in 2015, better growth prospects and a more appealing valuation, Wood Group could prove to be a better buy for next year – especially if the oil price shows little sign of improvement.

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Peter Stephens owns shares of BP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.