Exane upgrades Wood Group, highlights promising Upstream engineering pipeline

Exane BNP Paribas upgraded Wood Group to ‘outperform’ from ‘neutral’ and raised the price target to 815p from 695p.

It noted the shares have lagged more operationally-geared peers year-to-date.

“Wood offers relatively low-risk exposure to a number of areas of early-cycle spending growth, with a differentiated outlook in upstream engineering, and screens attractively versus the sector on free cash flow yield and embedded value-based metrics.

“Given the compression in relative dividend yield between AMEC and Wood Group, we think the latter should be particularly attractive for income hunters in the sector.”

The bank said that when it downgraded the stock last Autumn, one of its concerns was the potential for structural impacts to its revenue line to continue to impede the overall revenue recovery in the business. It estimated that the structural impact could be around 30% of the upstream/subsea engineering business.

Although Exane still thinks this holds, it said that in several business lines, the cyclical slowdown has overwhelmed the revenue recovery impact, with around 50% of the business now at or around the trough.

Upstream Engineering is down around 45% from the peak and Exane reckons this would be more than 50% were it not for Wood’s entry into Saudi Arabia.

It said Subsea engineering will likely be down about 50% from the peak in 2017, while North Sea revenues are already down about 60% from the peak.

The bank said Wood Group’s first-half results revealed a promising pipeline in Upstream engineering, for the first time in at least three years, thanks to secured contracts for projects such as Tengiz and Leviathan.

“In fact, we think the outlook is perhaps even more promising when looking out around 12 months.”

Wood Group shares closed flat on Friday at 701.94p.