It’s true that Brent oil prices remain pretty robust above $60 per barrel right now, but an uncertain outlook for crude in the medium-to-long-term means that I think Wood Group (LSE: WG) is a share to avoid right now.
I’ve long warned about the steady rise in the US rig count over the past couple of years, though data on this from Baker Hughes has been more encouraging, its weekly oil rig count falling for the last five weeks on the spin.
However, these cuts don’t represent a silver bullet to the prospect of oversupply, something which erratic US inventory data has done nothing to disprove — indeed, most recent figures from the both the Energy Information Administration and American Petroleum Institute showed stockpiles up by 2.8m and 1.9m barrels respectively in the last week.
As I’ve mentioned before, while US producers may be unplugging their drills at the present time, output from other major oil-producing nations like Canada, Brazil and Norway continues to go from strength to strength. All it will need is speculation that OPEC and Russia won’t be extending their supply cuts of the past couple of years to really put the frighteners on the market.
What’s more, increasingly bearish chatter on the health of the global economy, and consequently rising fears over the outlook for oil demand, is a serious threat to oil prices. The OECD downgraded its forecasts for global growth in 2019 once again this month, to 3.3% from 3.5%, while it also hacked back estimated expansion for next year to 3.4%, down 10 basis points.
So what does this mean for Wood Group? Well the engineering giant this month lauded the “new opportunities across our broader range of capabilities” that its acquisition of Amec Foster Wheeler nearly 18 months ago has created. According to the FTSE 100 firm, this has sealed $600m worth of multi-year contracts in that time. However, the uncertain outlook in the oil and gas industries, which I have mentioned above, means that business could dry up should fossil fuel extractors rein in spending once again.
Wood Group is taking steps to offset these problems and to support the balance sheet by engaging in an extensive asset disposal plan for non-core assets. And the Footsie firm made progress on this front this week with the sale of mining services specialist Terra Nova Technologies for $38m in cash.
I’m still worried, though, that net debt sits at a whopping $5.5bn and that this could step higher again in the event of eroding revenues. Moreover, Wood Group’s advice this week that it will be slower to meet its planned net debt-to-adjusted EBITDA target of 1.5 times because of a slower-than-expected recovery in the oil and gas sectors, working capital commitments on legacy contracts, and the slow progress of its disposal programme has cast further doubts that the firm can keep paying market-beating dividends.
City analysts expect the Footsie company to pay a dividend of 36 US cents in 2019, up from 35 cents last year. I’m not prepared to take this risk, though, and despite its bulky 5.4% yield I’d be happier to go dividend hunting elsewhere.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.