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Wood Group braces for sharp earnings fall

INVESTORS have wiped around ­ £300 million off the stock market capitalisation of Wood Group after the Scottish oil services giant said it expected to suffer a sharp fall in earnings in its key engineering division next year.

shale PLANS: Wood Group, led by CEO Bob Keiller, expects to benefit from a "healthy" shale market in the US.
shale PLANS: Wood Group, led by CEO Bob Keiller, expects to benefit from a "healthy" shale market in the US.

Aberdeen-based Wood Group predicted core earnings from the engineering division, which helps oil and gas firms develop new facilities, would be around 15% lower than in the current year.

However, the company is capitalising on the boom in spending on shale developments in the US, while its North Sea business remains strong.

Wood Group said it still expects to achieve some growth in overall earnings in 2014 after achieving a strong performance in the current year.

Growth in the business that ­maintains existing assets will offset the fall in engineering earnings next year. But with shares in Wood Group falling 10% yesterday, the contents of the update appeared to have rattled investors.

"There is no getting around the fact that Wood Group's pre-close trading update contains little to provide festive cheer at this time of year," analysts at joint house broker Credit Suisse told clients in a note.

The update from Wood Group provided further evidence of the challenges service firms are facing amid moves by oil and gas firms to cut spending on the kind of giant developments that have generated huge amounts of work for support firms.

With some majors coming under pressure to cut capital spending and increase payouts to investors, the outlook for investment in new offshore facilities next year is weak by recent standards.

Wood Group's chief financial officer, Alan Semple, said: "We are looking at a different environment at the present time, particularly with the majors."

He said the industry had seen a number of offshore projects deferred this year as a result of oil and gas firms reviewing the economics of the projects.

Wood highlighted the weakness of the market in Canada, where it has expanded through acquisition.

Mr Semple noted firms producing heavy oil from onshore sands in Canada face challenges getting their product to market. The boom in production from shale in the US has weighed on oil prices in Canada.

But Wood Group is benefiting from its exposure to shale oil and gas production in the US. It has built a big position through acquisitions including the recent $215m (£130m) purchase of Elkhorn.

The group, which is led by chief executive Bob Keiller, said its onshore pipelines operation continues to benefit from "healthy" US shale market activity.

Mr Semple said Wood Group may acquire more firms that support shale activity.

Regarding engineering, Wood Group concluded: "Looking ahead, the completion of significant projects and some deterioration in the themes we set out in our interim report in August, principally project delays offshore together with upstream weakness in Canada, is expected to result in a reduction in Engineering earnings before interest, tax and amortisation in 2014 of around 15%."

Mr Semple predicted engineering activity would pick up in the medium term. He expects some delayed projects will come back, possibly in a different form.

The company said its maintenance arm, which works on existing facilities, is performing strongly.

Growth in the maintenance arm has been led by the group's shale related activity onshore the US in recent months.

Mr Semple said the North Sea is a good, strong market.

The company is still making losses on a big contract in Oman.

Wood Group said performance across its gas turbine joint ventures is expected to be flat for 2014

Wood Group said: "The Group has delivered good growth in 2013 and is confident of achieving performance for the year in line with expectations."

Shares in Wood Group closed down 79p, at 718p. That left it with a market capitalisation of around £2.7bn.

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