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Why Petrofac Limited, Hunting plc & John Wood Group PLC’s Rebound May Have Even Further To Run This Year!

On 1 January I thought Petrofac (LSE: PFC), Hunting (LSE: HTG) and John Wood Group (LSE: WG) could rebound in 2015 — and they did.

Is there more to come?

After crashing so spectacularly in 2014, the price of oil has been trending up during 2015, which suggests we might have seen the lowest point.

A more stable and gradually increasing oil price is good for the oil industry. Oil & gas explorers and producers will likely be encouraged to spend more on the services provided by firms serving the industry. The improving situation shows in share prices, with Petrofac up 31% so far in 2015, Hunting up 21% and John Wood Group up 11%. But is there more to come?

In terms of business recovery, City analysts watching these firms predict earnings increases for two of the three during 2016. They think Petrofac will grow its earnings by around 71% and Hunting by 31%. They see the underperformer as John Wood Group and have an earnings decline of 2% pencilled in, but they don’t expect the firm to see profit collapse on the same scale as Petrofac and Hunting during the current year.

Will such business recovery result in higher share prices though?

Valuations

Broad-brush valuation indicators look like this:

 

Share price

Forward PER 2016

Forward dividend yield 2016

Price-to-book value ratio

Petrofac

926p

9

4.3

2.4

Hunting

629p

18.5

3.2

1

John Wood

681p

13

3.2

1.5

Petrofac’s price-to-earnings ratio (PER) and its dividend yield both seem the most compelling, but the firm also has the most volatile earnings.

We need to look deeper into valuations before committing to these companies from here, but we also need to look ahead. Where, for example, might the oil price go from here? That’s an important question, because the price of oil largely drives the industry.

What the directors think

Petrofac updated the market yesterday and the chief executive said that the firm’s Engineering, Construction, Operations & Maintenance division enjoyed a good start to the year, securing more than US $4.7 billion of order intake. He reckons the company’s order backlog stands at record levels, which give revenue visibility for the rest of 2015 and beyond. Petrofac sees an attractive pipeline of bidding opportunities and ongoing investment by the firm’s clients in large strategic projects.

In Petrofac’s Integrated Energy Services division we get the sense that the firm might be engaged on something of a damage-limitation exercise when the top man says the firm’s focus is on generating value from the existing project portfolio and reducing the capital intensity of the business

Things sound a little less upbeat at Hunting. Back in April the firm said the outlook for trading in the remainder of 2015 and into 2016 is unclear. However, the directors think capital investment and activity levels in the industry will recover when the supply and demand balance across the industry is resolved.

Back in May John Wood Group reckoned the firm hadimproved visibility on customers’ spending plans for the year, although market conditions were challenging. However, the company expects to reduce costs by over $30m in 2015. Again, without committing to a forecast, Wood said it is confident of delivering good growth as market conditions improve. Look out for another update from the firm due tomorrow, 25 June.

What next?

To me, Petrofac sounds the most optimistic, while Hunting and John Wood Group both play wait-and-see, just like us investors. Over the long term, my guess is that these firms will recover further and we can monitor the price of oil to gauge whether such recovery is likely to remain on track. In the shorter term, these shares already enjoyed a good bounce this year and, arguably, valuations might be a little stretched.

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