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Europe United Kingdom
Oil & Gas
24 February 2009
UK Oil Services
H2'08 results preview
Christyan Malek
Research Analyst
(44) 20 754 58249
christyan.malek@db.com
Lucas Herrmann, ACA
Research Analyst
(44) 20 754 73636
lucas.herrmann@db.com
Jonathan Copus
Research Analyst
(44) 20 754 51202
jonathan.copus@db.com
Take nothing for granted
The UK reporting season should see solid earnings performance reflecting
completing contracts signed on attractive (yet in our opinion unsustainable)
margins. As we progress through a period of heightened uncertainty for the oil
services, that at best can be described as a 'temporary down-cycle', we look for
the signs of stress to emerge. The relevance therefore of these results could be to
reveal stocks that will differentiate and outperform not least in their ability to
position themselves optimally. Our top pick is Amec.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Results
Top picks
AMEC Plc (AMEC.L),GBP515.00 Buy
Companies featured
AMEC Plc (AMEC.L),GBP515.00 Buy
2007A 2008E 2009E
DB EPS (GBP) 27.46 42.32 52.53
P/E (x) 22.6 12.2 9.8
EV/EBITA (x) 9.1 4.4 3.3
Lamprell (LAM.L),GBP86.75 Buy
2007A 2008E 2009E
DB EPS (USD) 0.43 0.48 0.47
P/E (x) 15.9 2.6 2.7
EV/DACF (x) 14.0 0.6 0.1
Petrofac (PFC.L),GBP444.00 Hold
2007A 2008E 2009E
DB EPS (USD) 0.56 0.78 0.79
P/E (x) 16.1 8.3 8.2
EV/DACF (x) 9.2 5.3 4.0
John Wood Group PLC (WG.L),GBP193.25 Sell
2007A 2008E 2009E
DB EPS (USD) 0.35 0.46 0.48
P/E (x) 19.3 6.2 5.9
EV/DACF (x) 11.6 4.3 4.4
Global Markets Research Company
Points of differentiation
We forecast 22% y/y H2 ‘08 earnings growth, on average, for the UK oil services
and 9% sequential growth. The key driver will be projects nearing completion
(with upside to our forecast linked to contingencies being released) as well as
existing backlog materialising. We believe the lack of backlog replenishment and
more challenging pricing environment will take time to feed through company
bottom lines (previous down-cycles indicate up to 9 months). Our company results
focus highlighted in this note therefore centres on the areas that warrant closer
scrutiny and include: cashflow management (ability to handle client default and
late payments), levels of staff utilisation, operational and execution success and
finally the extent to which existing backlog maybe threatened; perhaps not
cancelled but either stretched out or renegotiated (particularly on projects still in
their early design phase).
Valuation and risks
Our 2010E sector EV/DACF is currently 3.4x (market cap-weighted) which
represents c. 67% discount to the historical average (2000-08E) of 10.3x. Given
the positive momentum in global capex we expect over the mid to longer term
against the material slowdown we now forecast in earnings momentum, we
believe on balance that our target sector multiple (2010) should trade at a
moderate discount to historical multiples. However taken together with 1) the
heightened lack of visibility surrounding credit markets and, 2) uncertainty around
the degree of pricing deflation impacted on the group on balance, we argue our
sector target multiple should be set at a 50% discount to the historical average.
Nonetheless, we still see significant upside potential to our top pick Amec. Key
risks include oil prices < $50/bbl for a sustained period and poor execution.
Table of Contents
H2 previews
Amec (March 12th) .................................................................................................................... 4
Lamprell (March 30th ) ............................................................................................................... 6
Petrofac (March 9th) .................................................................................................................. 8
Wood Group (March 3rd) ......................................................................................................... 10
Appendices
Appendix A: Valuation matrices .............................................................................................. 12
Appendix B: DBe vs Consensus ............................................................................................. 14
Appendix C: Revenue and margin momentum....................................................................... 15
Appendix D: Lumpsum / cost plus contracting strategy – company rankings ........................ 16
Appendix E: Company targets ................................................................................................ 17
Appendix F: Acquisitions and JVs by Amec since H1’08........................................................ 18
Appendix G: Summary of pre-close trading updates 2008...................................................... 19
Appendix H: Company P&Ls................................................................................................... 21
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