Wood Group, the UK oilfield services company, warned that profit margins would decline further this year despite a recent stabilisation of oil prices and higher activity in the US shale industry.
The group’s shares were down by more than 8 per cent in morning trading on Tuesday after analysts expressed disappointment in the company’s cash conversion rate, as oil explorers and producers take longer to pay services groups.
Total revenue at Wood Group dropped almost 16 per cent in 2016 to $4.9bn, as spending by global exploration and production companies fell for a second consecutive year.
Wood Group’s ebitda margin, a measure of profitability, edged back to 7.4 per cent, from 8 per cent in 2015, as the company, like other services providers, remained under pressure to keep prices low.
David Kemp, finance director, said margins would “continue to go down in 2017”, even though spending by oil majors was expected to rise this year, driven by a recovery in the US shale industry.
A recent Barclays survey of oil explorers and producers pointed to 7 per cent growth in investment this year. But Wood Group said it expected only a “modest” recovery in markets such as US onshore.
The company is not expecting a dramatic rise in prices in North America and any benefit from the shale recovery was more likely to be felt in a higher volume of contracts.
Conditions in markets outside of the US would continue to remain challenging, Wood Group said.
In the UK North Sea, the company said there were no encouraging signs of activity increasing, despite a recent pick-up in mergers and acquisitions in the region.
Robin Watson, Wood Group’s chief executive, welcomed new entrants to the North Sea but said these competitors would not compensate for the reduction in both volumes and margins in the region that has occurred since oil prices began their sharp slide in mid-2014.
Annual pre-tax profit at Wood Group fell 52 per cent to $66m as the company booked $140m of exceptional costs, including an $89m impairment and restructuring charge against EthosEnergy, a joint venture with Siemens.
Wood Group has been reorganising its structure, cutting costs and reducing headcount to face up to the changes in the industry over the past two and a half years.
It cut a further $96m of costs last year on top of $148m in 2015. Headcount has decreased by 36 per cent over two years to 29,000.
Analysts at Credit Suisse said the “worst of the downturn is behind Wood Group” but highlighted “disappointing” cash conversion last year.
Oil explorers and producers are holding on to their cash for longer, Wood Group acknowledged, leading to an increase in the number of days between when the company made a sale and when it collected revenue to 74, from 63 previously.
“What we have seen is it is much more difficult to get our customers to pay on time generally,” Mr Watson said.
Wood Group’s shares were down 8 per cent at 753p at midday.
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