The former has lost 95% of its value in just 18 months due to a major accounting error, savers rushing to withdraw their cash and a poorly received (and subsequently pulled) bond issue. To say that the challenger bank finds itself challenged is putting it lightly.

Kier’s recent performance is equally shocking. Over the last 12 months, the share price has fallen 86% for many of the same reasons: an emergency cash call, an accounting error, and a profit warning. Restructuring costs remain a drag and Brexit continues to cast a shadow over the property, residential, construction and services firm.

With things looking so bleak, it’s natural that some should try to find a way of profiting. As I type, both Metro and Kier rank among the most shorted stocks on the London Stock Exchange. In other words, investors are making sizeable bets that the share prices of both are likely to fall further. 

Regardless of what you feel about the ethics of short-selling, it can be very lucrative. Many of those that wagered against market casualties like Carillion and Debenhams made a lot of cash in the process. That’s not to say it isn’t high-risk — losses are technically infinite if they get their calls wrong and share prices rise.

There is, however, another business that’s more hated than either Metro and Kier. 

The silver medal goes to…

With 9.7% of its stock currently being shorted, FTSE 250 member and oil services provider Wood Group (LSE: WG) ranks second in the leaderboard and above both Kier and Metro. Worryingly, the only company with more short positions hanging over it is Thomas Cook. 

At first glance, this all seems a bit harsh, especially when you take the company’s recent interim results into account. Back in August, the Aberdeen-based business revealed a $13m profit over the first six months of 2019 compared to a $52m loss over the same period last year (despite logging a 2.6% decline in revenue to $4.8bn). Wood also maintained its outlook for the full year and stated that it was “well-positioned for growth across the energy and built environment markets” beyond this.

Unfortunately, the market just doesn’t seem interested, with the fall in Wood’s share price over the last year showing no signs of abating just yet. Arguably the biggest concern is the amount of debt the company still carries.  

Net debt stood at $1.77bn by the end of June, 14% higher than at the same point last year. And while the sale of its nuclear business for $305m is expected to reduce leverage once the deal is completed in Q1 2020,  it would appear some also have concerns about Wood’s limited exposure to the recovering offshore and liquid natural gas markets compared to rivals.

A price-to-earnings (P/E) ratio of just over eight might look cheap, but there’s certainly an argument for saying that even this valuation might come under review if the health of the global economy were to deteriorate. At 8.3%, the yield is one of the highest in the FTSE 250 but dividends are, somewhat ominously, barely growing.

The shorters have been wrong in the past — Ocado being a perfect example. Could they have got Wood Group wrong as well?

The post This FTSE 250 stock is even more hated than Metro Bank and Kier Group! appeared first on The Motley Fool UK.

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Paul Summers 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.

Is this the right view, or should the market be more wary about the outlook for debt-laden Tullow?

What’s gone wrong?

Africa-focused Tullow was one of the big casualties of the 2015/16 oil market crash. The firm’s shares are still worth about 75% less than they were five years ago, thanks to a debt burden that peaked at $4.8bn in 2016.

Things are improving. In a statement today, the company said that production totalled 88,200 barrels of oil per day (bopd) in 2018, and is expected to rise to 93,000-101,000 bopd in 2019.

Net debt fell from $3.5bn to $3.1bn last year, thanks to free cash flow of $410m. However, these figures missed the guidance provided by the company in November. Back then, it said net debt would fall to $2.8bn and free cash flow would be $700m.

The main problem seems to be that the company has not yet finalised a deal to sell a share of its Ugandan oil fields to French firm Total for about $200m. The company now hopes to finalise this deal in the first quarter of 2019, but press reports suggest a potential tax dispute with the Ugandan authorities.

Buy, sell or hold?

Tullow Oil intends to pay an annual dividend of at least $100m starting from 2019. My sums indicate that this would be worth about 7.2p per share, giving a prospective yield of 3.6%.

Personally, I think it’s a little too soon to be making such generous payouts. But management seems confident it can continue to reduce debt while increasing spending on shareholder returns and new growth projects.

Tullow shares look cheap on a 2019 forecast price/earnings ratio of 9. But in my view the size of the firm’s debt pile means that this valuation is probably high enough. I’d continue to hold the shares, but I won’t be buying.

Here’s one I would buy

One oil-related stock I would like to own is engineering services firm John Wood Group (LSE: WG).

This FTSE 250 oil services business also operates in a range of other industries, such as nuclear power and renewables. However, oil and gas still account for the majority of profits.

Service companies like Wood Group are usually slower to recover after an oil market slump. This is because the firm’s customers don’t start spending again for some time after the price of oil has recovered. Tullow is a good example — three years after the price of oil started to recover, the firm is starting to invest in new projects again.

Now that customers are becoming more confident, Wood boss Robin Watson expects profits to start rising again. Analysts expect the group’s earnings to climb 19% to $0.71 per share this year. This puts the stock on a modest forecast P/E of 10.3, with a dividend yield of 4.8%.

Wood’s dividend hasn’t been cut since the firm’s flotation in 2002, and has historically been backed by strong cash flows. I’d rate this stock as a solid income buy at current levels.

The post This is what I’d do about the Tullow Oil share price right now appeared first on The Motley Fool UK.

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Roland Head owns shares of Total SA. 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.

Does a more attractive valuation, not to mention sizeable dividend, make this a company worth investing in? Based on the reaction to today’s pre-close update for the full year, at least some market participants think so. 

“Solid progress”

This morning, Petrofac said it was trading in line with expectations and that it had secured $5bn worth of orders from both core and growth markets in the year to date. Considering the competitive environment in which it operates, that’s not bad at all. 

In addition to winning contracts in markets such as in Thailand, India and The Netherlands, the company also said it was currently bidding on “more than” $15bn of tenders that would be awarded in the first half of next year. 

Elsewhere, “solid progress” had been made on delivering engineering and construction (E&C) projects in Kuwait and Abu Dhabi, while extensions to engineering and production services (EPC) contracts helped make up for “a challenging market environment for brownfield projects in the North Sea.” 

Partly as a result of lower capital expenditure, Petrofac’s debt pile continues to shrink, from $600m last year to “around” $250m at the end of 2018. CEO Ayman Asfari highlighted that the company had made “excellent progress” in becoming a capital-light business — having now sold $8bn of non-core assets — and would continue to “review options” for those that remain. 

Full-year numbers will be confirmed on 28 February. For now, the stock trades on 6 times forecast earnings for the next financial year and comes with a secure-looking, near-7% yield. That may be cheap, but it’s worth keeping in mind a couple of risks.

Firstly, Petrofac’s fortunes rest on something it can’t control, namely the price of black gold. Having already fallen over 30% in just a couple of months, due to fears of oversupply in the US (now the world’s largest producer), there’s no saying it won’t drop further in the short term. Secondly, you can expect further selling pressure if the outcome to the ongoing investigation by the Serious Fraud Office is negative. 

All told, I’d be more inclined to buy industry peer Wood Group (LSE: WG), currently.

Contract wins 

Following hot on the heels of last week’s announcement that it had penned a contract to provide engineering, procurement and construction services to support a “world-class plastics manufacturing facility” in the US, the £3.6bn-cap revealed this morning that it had also secured a $66m deal to provide digital control technologies to the Sellafield nuclear site. 

The 10-year contract includes “all stages of system design, manufacture and assembly of equipment” and, according to the energy services business, helps justify the acquisition of Amec Foster Wheeler last year.

Like Petrofac, the firm’s shares have been volatile and now trade 15% below where they were at the start of 2018. Based on today’s price, Wood’s stock currently changes hands on 9 times earnings for 2019 and comes with a 5.3% yield, covered twice by profits. 

If you’re considering taking the plunge on either company, I’d say it’s more important than ever to ensure that your portfolio is suitably diversified and that your holdings match your risk tolerance and investing horizon.

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Paul Summers 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.

That seems to be the view held by management at Tullow Oil (LSE: TLW). The FTSE 250 oil producer has announced plans to restart dividend payments in 2019. The firm also hopes to develop “two major projects in Uganda and Kenya that have the potential to grow the Group’s production by 50%”.

This bullish stance is only possible now that the firm’s debt levels have fallen to more reasonable levels. But this strategy also suggests that Tullow boss Paul McDade expects oil prices to stabilise at levels that will support profitable growth.

How cheap is the stock?

At face value, Tullow stock looks quite cheap to me. The shares trade on a 2018 forecast price/earnings ratio of 8.7, falling to a 2019 P/E of 7.

Free cash flow excluding a one-off gain is expected to be $500m this year, giving a forecast price/free cash flow ratio of just 6.7.

This influx of cash will help to reduce net debt, which is expected to fall to $2.8bn by the year-end. This will give a leverage multiple of 1.8x EBITDA (earnings before interest, tax, depreciation and amortisation). That’s comfortably below my preferred maximum of 2x.

The right time for growth?

Mr McDade says that “having embedded cost discipline across the group”, now is the right time to focus on growth. I agree that the time is probably right and share his view that Tullow has some attractive assets to develop.

My concern is that the company hasn’t shown great financial discipline in the past. Tullow went into the 2014 oil price crash with far too much debt. The firm ended up having to raise cash from shareholders in a rights issue, and hasn’t paid a dividend since 2014.

Although the business is now generating plenty of cash, the shares are still worth about 85% less than at their 1,300p+ peak in 2012. Will Mr McDade manage to create lasting value and income for shareholders, or will this be another boom and bust story?

Tullow stock could do well from here, but for long-term investors I think there’s a better option elsewhere.

Sustainable long-term growth

Companies providing technical services to oil exploration and production companies have struggled to return to profit growth since 2016. But if Tullow’s view on growth is shared by other companies in this sector, then demand for oil services could start to grow.

One of my preferred stocks in this sector is John Wood Group (LSE: WG). The group’s 2017 acquisition of Amec Foster Wheeler has left it positioned to expand into other industrial sectors, but oil field services remain a core part of the business.

Unlike Tullow, I believe Wood Group does have a good track record of financial discipline. The group’s dividend has been held or increased each year since 2004, and shareholders have never seen the kind of value destruction endured by Tullow investors since 2012.

Wood Group stock currently trades on 14 times 2018 forecast earnings, with a 4.2% dividend yield. Analysts expect earnings to rise by 24% in 2019, giving a P/E ratio of 11.4. I rate the shares as a buy.

The post Is the Tullow share price a bargain or should I buy this FTSE 250 dividend stock? appeared first on The Motley Fool UK.

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Roland Head 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.

Today I’m going to take a fresh look at this big-cap income stock and consider a possible alternative from the FTSE 250.

Oozing confidence

In the early stages of the oil market downturn, BP chief executive Bob Dudley correctly forecast that the price of oil would stay “lower for longer”. This stance has led to a five-year programme of change that’s designed to allow the company to break even at $35-$40 per barrel by 2021.

So far Mr Dudley’s judgement calls have delivered good results for shareholders. He’s managed the resolution of the Gulf of Mexico disaster and navigated through the oil market crash without cutting the dividend.

The group’s underlying replacement cost profit — an industry measure — rose by 139% to $6.2bn last year. BP is now starting to ramp up investment in new projects.

The biggest of these is the recent $10.5bn acquisition of BHP Billiton‘s US onshore oil and gas business. This will add 190,000 barrels of oil equivalent per day to BP’s production, plus 4.6bn barrels of discovered resources.

This bold deal suggests to me that Mr Dudley is now confident of several years of stable oil prices.

A turning point?

The oil sector appears to be at the start of a growth phase, and BP’s adjusted earnings are expected to rise by 79% to $0.56 per share this year.

This puts the shares on a forecast P/E of 12.5 with an expected dividend yield of 5.6%. Although net debt of $39bn is a little higher than I’d like to see, cash generation is improving rapidly. I can’t see debt becoming a problem for the foreseeable future.

Mr Dudley’s confidence may well be justified. For investors wanting a reliable high-yield stock, I’d rate BP a buy at current levels.

An interesting alternative

As oil producers start to expand again, companies offering petroleum engineering services are also starting to enjoy stronger market conditions.

FTSE 250 firm John Wood Group (LSE: WG) said today that it’s now “seeing recovery” in the oil and gas market. This engineering firm was previously a pure play on the oil and gas sector. But last year’s acquisition of Amec Foster Wheeler means it now offers a wider range of services.

In half-year results published Tuesday, Wood said sales for the combined group rose by 13.4% to $5,382m during the first half. Underlying operating profit rose from $72m to $125m, and the interim dividend was increased by 2% to 11.3 cents per share.

The right time to buy?

Integrating Amec Foster Wheeler is a big job. But in my view Wood benefits from strong management and good financial controls. Although net debt looks high at $1.6bn, that’s only slightly more than four times forecast net profit for the current year.

I can live with that, especially as reducing leverage to a more conservative level remains “a key priority” for chief executive Robin Watson. Debt reduction should be made easier by $200m of planned asset disposals and a three-year plan to cut $210m from the combined group’s annual costs.

Mr Watson is confident of “a stronger second half”. With the stock trading on 14.6 times forecast earnings and offering a 4% dividend yield, I rate it as a buy at current levels.

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Roland Head 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.

The yellow metal has eroded from 2017 peaks of around $1,350 per ounce set in September, prices coming under pressure as tensions between the US and North Korea have receded and expectations of extra monetary policy tightening by the Federal Reserve (and central banks further afield) have grown. Bullion was last dealing at around $1,240.

However, gold demand has not exactly fallen off a cliff as evidenced by latest World Gold Council data. This showed holdings in global gold-backed ETFs rose by 9.1 tonnes in November, taking the total to some 2,357 tonnes.

The continued demand for the safe-haven commodity does not come as a surprise to me given the reserves of political and economic intrigue still spooking markets.

Will President Trump continue to face legislative roadblocks? What will Robert Mueller’s investigation into Russian collusion mean for the future of the Trump administration? How will the White House respond to the next set of provocations from Pyongyang? And, across the Pond, when will the UK government get to grips with the Brexit conundrum?

And any of these issues have the potential to blast bullion values higher in the weeks and months to come.

They say that investors should always make room in their portfolios for gold, or at least exposure to gold-producing companies, as a hedge against so-called ‘doomsday scenarios’ that could batter the rest of their holdings.

In the current environment this sentiment is a wise strategy, in my opinion. And buying into metals mammoth Randgold Resources could prove a very wise move.

With City analysts predicting that gold values will remain strong, and Randgold steadily increasing output across its African mines, earnings at the business are anticipated to shoot 18% higher in 2017 and 24% higher in 2018.

A forward P/E ratio of 28.9 times may look expensive on paper, but I reckon the London company’s robust long-term profits outlook merits such a premium.

In deep water

I am afraid that my positive outlook for gold values does not extend to another go-to commodity in uncertain times — crude oil — given enduring questions over the enduring market imbalance.

Supply disruptions and the recent OPEC agreement to keep the taps turned down has propelled energy values skywards recently and just this week, Brent sprang to two-and-a-half-year highs above $65 per barrel following the closure of the Forties North Sea pipeline.

But with output from US shale producers heading steadily higher, and investment in the oil sector by other major producers like Canada and Brazil also increasing, my long-term view on crude values remains pretty pessimistic.

And as a result I will continue to give oilfield services play John Wood Group (LSE: WG), which reported today, short shrift. It advised on Wednesday that “our core oil & gas market continued to present challenges in 2017” and trading could very well remain tough as  oil producers batten down the hatches in a bid to conserve cash.

City analysts are expecting earnings to fall 8% in 2017 and to recover 9% next year, but I believe the possibility of extended profits declines is extremely high. As a result I for one will be giving Wood Group a wide berth despite its cheap forward P/E multiple of 13.8 times.

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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.

Growth potential

Reporting on Tuesday was energy services company Wood Group (LSE: WG). While its performance in the first half of the current year was down on the same period from the prior year, this was reflective of difficult market conditions across its operations. In particular, the North Sea market remains challenging, although the company’s full-year outlook is unchanged. It expects to deliver stronger performance in the second half of the year, while its acquisition of Amec Foster Wheeler has the potential to be a positive catalyst on its performance.

While buying an oil and gas-focused company may not seem logical from an income perspective due to the uncertain outlook for the industry, Wood Group offers strong dividend prospects. It currently yields 4.6% from a dividend which is covered 1.6 times by profit. This suggests that further dividend growth could be ahead.

Since its bottom line is forecast to rise by 19% next year, it also offers a low valuation and a wide margin of safety. For example, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.6, which suggests that it could deliver high capital growth as well as a strong income return.

A changing business

Also offering a strong income outlook is insurance company Aviva (LSE: AV). It has made wholesale changes to its business model in recent years, and they have contributed to a significant uplift in its financial performance. For example, it was lossmaking in 2012, but is due to deliver a pre-tax profit of almost £2.5bn in the current year. Next year, it is expected to increase its bottom line by 7%, which puts it on a PEG ratio of only 1.4.

As well as growth and value prospects, Aviva currently yields around 4.9%. Dividends are covered twice by profit and this means there is sufficient capital available for reinvestment. While much of the asset disposals and changes to its business have now been completed, there is still scope for further improvements in its efficiency and financial strength. They could act as positive catalysts on its investment performance and lead to improved investor sentiment over the medium term.

With Brexit unlikely to severely affect Aviva’s business performance, its outlook is positive. With high return potential and a solid business model, it could prove to be a strong income stock in the long run.

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Peter Stephens owns shares of Aviva. 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.

Cautious outlook

Initial impressions aren’t great. Over the six months to the end of June, the company has continued to experience challenging conditions in its core oil and gas market. It would appear that decent business in the Western Hemisphere has been “more than offset” by a fall in project and modifications work in the East, especially in the North Sea.  

As a result of this, the company declared that first-half performance had been “weaker than anticipated” and worse than that achieved over the same period in 2016. Consequently, the Aberdeen-based business is now “more cautious” on its outlook for the full year while still anticipating stronger trading in H2.

These are clearly tough times for any company with connections to the oil industry.  Nevertheless, for those brave enough to consider investing, I’m inclined to think that there are far worse options available than Wood Group, even if — at 15 times earnings — the shares are still too dear for my liking.

The balance sheet “remains strong“, at least according to the company, even if its net debt-to-EBITDA ratio is at the “upper end” of its preferred range of 0.5 times to 1.5 times. The progressive dividend policy also remains in place for now with a forecast yield of almost 4% pencilled-in for 2017.

Importantly the company is still winning business. Only today, it announced that it had secured a multi-million dollar contract to complete engineering, construction and procurement work for Husky Energy, one of Canada’s largest energy companies, on the latter’s White Rose project. Let’s not forget that the company’s acquisition of Amec Foster Wheeler — due for completion in Q4 of 2017 — should also give it huge clout in the markets in which it operates.

Too much baggage?

While the fortunes (and share prices) of those offering services in the oil and gas industry ultimately depend on something they can’t control, industry peer Petrofac (LSE: PFC) also has to contend with far bigger problems thanks to the ongoing investigation into corruption by the Serious Fraud Office. 

Let’s say the outcome isn’t favourable. If this turns out to be the case, the company could be hit by a huge regulatory fine that would surely necessitate the suspension of its chunky dividend. Given the attraction of the latter to income investors over recent years, that’s going to leave a lot of disappointed holders. In such a situation, I can see many deciding to move their money elsewhere, prompting a further fall in Petrofac’s share price. 

Even if the outcome isn’t as bad as expected, one must surely consider the time needed to rebuild Petrofac’s reputation with prospective clients as a result of this whole episode. Ask yourself: would you think twice about engaging with a company while the memory of such accusations remains strong? I know I would. 

While a 27% rise in its share price over the last couple of weeks suggests many contrarians sense opportunity, I — for one – won’t be joining them.

The post Why John Wood Group plc could be a better buy than Petrofac Limited right now appeared first on The Motley Fool UK.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. 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.

The Frankie and Benny’s owner flipped higher last month after news that like-for-like sales edged down 1.8% during the 20 weeks to May 21. While far from impressive at face value, it led to chatter that the restructuring strategy is beginning to pay off but underlying sales fell by a more painful 3.9% in the 12 months to January.

But investor enthusiasm fizzled out almost immediately as fears over the structural woes facing the business resurfaced. With the bulk of The Restaurant Group’s sites being located in or around Britain’s retail parks, the company is likely to see footfall keep decreasing as tough economic conditions cause shoppers to stay at home. And the rapidly-growing internet shopping phenomenon is pulling even more potential diners away from its doors.

And increasing competition puts the recovery plan in even more  jeopardy.

Dividends diced

The Restaurant Group was forced to scythe the dividend in the year to January 2017 as earnings swung 19% lower, the company paying out 15.84p per share versus 17.4p in the previous year. And with City brokers expecting another 19% decline in the current fiscal period, another dividend reduction, to 15.4p, is currently being bandied around.

While this figure still yields a healthy 4.6%, flimsy dividend coverage of 1.4 times — some way below the widely-regarded safety benchmark of two times or above — makes me more than a tad wary that current payout projections will be met.

I reckon investors should be prepared for a much more painful payout cut than is currently predicted.

Dangerous driller

I also believe risk-averse share pickers should give Wood Group (LSE: WG) a wide berth, despite predictions of meaty near-term dividends.

The oilfield services play is expected to raise 2016’s dividend of 33.3 US cents per share to 33.4 cents in the current period, meaning it sports a market-beating 4% yield.

The number crunchers see no return to earnings growth any time soon however, and Wood Group is expected to follow last year’s 23% earnings drop with an additional 17% fall in the current period. As a consequence, dividend coverage clocks in at just 1.6 times.

Regardless of whether or not Wood Group’s proposed merger with Amec Foster Wheeler is hampered by the Serious Fraud Office probe into Unaoil — Wood has launched an internal review into its own dealings with Unaoil, while Amec has been asked to provide information to the SFO on its history — the murky state of the oil market would discourage me from spending my own investment cash right now.

Brent crude prices have receded to their lowest since November below $45 per barrel this week, and I expect the downtrend to continue as returning US shale producers keep the oil glut in business. In this environment, I would expect demand for Wood Group’s services to remain subdued, and reckon earnings are in danger of stuttering lower well beyond this year.

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Royston Wild has no position in any 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.

Beyond the shale

The US isn’t bound by any production agreement so can carry on fracking and pumping at will, and with Donald Trump in the White House, that is exactly what it is going to do. Producers in the vast Texas Permian Basin reckon they can break even at prices as low as $30 a barrel, which makes me sceptical about investing in low-margin producers in other oil sectors and regions. I have been looking for a domestic way to play shale and I wondered whether these two companies might fight the bill.

London listed engineers Amec Foster Wheeler (LSE: AMFW) and Wood Group (LSE: WG), which agreed a £2.225bn merger last week, have both made acquisitions, giving them exposure to unconventional oil and gas markets in the US. Amec paid £1.9bn for petrochemicals engineering company Foster Wheeler in 2014, while Wood Group bought PSN in 2010 for around £600m. Wood Group has also said it would support UK shale companies if fracking is allowed here, although that could take time.

Aberdeen Anguish

The two Aberdeen-based companies have been squeezed in the wider oil sector crunch. Amec Foster Wheeler has seen its share price almost halve in the past two years. Last week’s update showed trading profits down from £374m to £318m, with like-for-like revenues down 8% to £5.44bn, as continuing weakness in the oil and gas market offset a strong performance in its solar division. Trading margins fell 110 basis points to 5.8%. 

Wood Group has also floundered, with total revenues shrinking 15.7% in 2016 to $4.93bn, while operating profits fell 22.8% in EBITDA terms. However, its £2.2bn all-share takeover gave its shares a lift, with the new entity anticipating sustainable cost synergies of at least £110m, plus diversification benefits. Let’s hope this link-up, assuming it completes, goes better than Amec’s merger with Foster Wheeler, which brought shale exposure and global diversification but saddled the company with £1bn in debt.

Power down

Amec Foster Wheeler has some diversification through its engineering and installation capabilities, while Wood Group also operates in the power plant, industrial and key energy sectors. However, oil and gas remains a tough sector to be in, and I cannot see that changing.

Although both companies now have access to US shale, their exposure simply isn’t enough to be a game-changer. Shale also has challenges, as salaries and costs are starting to climb as the boom gets back into gear, pushing up costs and cutting margins. Also, shale is likely to turn into a global revolution, with new production popping up everywhere, including a massive new basin in Mexico.

Boom or bust

If the merger goes through, the new entity will hold a combined 60% share of the North Sea oil services market, which is where their major interests lie. Their exposure to shale is relatively small. In fact, the shale boom, if it continues, is likely to inflict more harm than good on their wider energy interests.

The post Are these two oil stocks the best way to play the US shale revolution? appeared first on The Motley Fool UK.

More reading

• Lost money on Diageo shares? Consider buying this £2.19 FTSE stock to try and make it up
• How much is needed in an ISA to target a £2,764 monthly passive income?
• Alphabet could rise to $427 say analysts, but is Microsoft the better Mag 7 stock to consider buying for an ISA?
• At 27 years old, will a cash ISA or Stocks and Shares ISA help build wealth faster?
• How these 2 dividend shares could help an ISA investor target a £1,639 income in 2026

Harvey Jones 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.