Oil service companies like John Wood Group (LSE: WG) were a more profitable investment than many oil producers when oil prices were high. Yesterday’s results from Wood Group suggest to me that the best of these companies might remain a better investment now that oil is cheap.
In interim results on Wednesday, Wood Group reported a 19.3% decline in revenue and said that market conditions remained challenging. That’s no surprise. What was surprising was that the firm’s operating margin of 5.6% was almost unchanged from the 2014 figure of 5.9%.
One reason Wood Group’s profitability has remained so strong is that it has been able to cut costs and reduce staffing levels very rapidly. The firm said that cost savings of $40m were ahead of expectations, and that group headcount had fallen by 13% since December.
As I write, Wood Group is trading at around 550p. This puts the firm’s shares on a 2015 forecast P/E of 11, with a prospective yield of 3.5%. I think there’s a strong chance that these shares will turn out to be a good medium-term buy at this level.
What about LGO and Petroceltic?
When oil prices crash, Wood Group can slash pay rates and dispose of surplus contractors in order to cut costs.
For small oil and gas producers like LGO Energy (LSE: LGO) and Petroceltic International (LSE: PCI), it’s not so simple. Although drilling and other operating costs are falling, they are tied into project plans designed for much higher oil prices.
Each company also has its own specific issues.
Shares in Petroceltic fell by 7.4% in the first hour of trading this morning. The trigger for the fall was a public letter from the firm’s largest shareholder, activist investor Worldview Capital Management.
Yesterday, Petroceltic published details of contract awards for its Ain Tsila development in Algeria.
This morning, Worldview published a letter asking Petroceltic to clarify public allegations made against the firm’s management relating to its operations in Algeria.
Petroceltic is at the centre of a long-running dispute over corporate governance with Worldview. Although some of the firm’s assets are attractive, I’m not sure it’s worth the risk of buying into a firm that’s attracting so much negative attention.
Over at LGO Energy, the picture should be simpler. LGO is drilling lots of relatively cheap, quick wells in order to tap into the oil in its Goudron field in Trinidad. This morning, LGO announced initial production from the Drilling Pad 5 GY-675 well of 325 barrels of oil per day (bopd).
That sounds promising, but my concern is that production rates from Goudron wells may not be sustainable.
On 6 January, LGO said that its GY-670 well was flowing at a restricted rate of 1,045 bopd. The group’s 10-day average production rate was reported to have “exceeded 2,000 bopd since the 23 December 2014”.
Despite this, the most recent operational update from LGO, on 29 July, reported group production averaging 951 bopd during Q2.
What’s happened to LGO’s production between January and August? Today’s testing update did not include an update on group production, so investors may have to wait a little longer to learn more about this situation.
Regardless of your view on LGO, investing in commodity stocks in current market conditions is not for the faint-hearted.
If you want to take advantage of today's depressed prices while minimising the chance of a big loss, then I have a suggestion.
The investment strategy described in "7 Simple Steps For Seeking Serious Wealth" is repeatable and quick.
Using this approach to manage your portfolio could take as little as 20 minutes per month!
This exclusive new report is FREE and without obligation.
To receive your copy today, click here now.
Roland Head has no position in any shares mentioned. 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.