Wood Group shares have fallen significantly in recent months. The multinational energy services company has seen its stock price decline by over 40% since the beginning of 2022. There are several factors contributing to the downward trajectory of Wood Group’s share price.
Oil and gas exposure
A major reason behind the falling Wood Group share price is the company’s significant exposure to the oil and gas industry. Around 60% of Wood Group’s revenues come from oil and gas projects and services. With oil and gas markets remaining volatile due to geopolitical tensions and recession fears, investors have become increasingly bearish on energy services firms like Wood Group that rely heavily on this sector.
Brent crude prices have pulled back from 14-year highs above $120 per barrel reached earlier this year to around $85 currently. Lower oil prices lead to reduced capital spending by oil and gas companies, directly impacting the revenues of their services providers like Wood Group. The potential for an economic slowdown also threatens to dent energy demand, further weighing on the sector.
Disappointing financial performance
Wood Group’s recent financial results have disappointed the market and raised concerns about the business. In the first half of 2022, the company’s revenue declined 15% year-on-year to $3.1 billion while pre-tax profit fell 23% to $33 million. Performance was hampered by reduced customer spending in light of inflation and recession risks.
Wood Group also had to take $46 million in charges related to its exit from Russia following the invasion of Ukraine. It lost $7 million on the sale of its built environment consulting business last year. Such one-off charges and asset disposals have hurt the company’s bottom line and led investors to question the strength of the underlying business.
Debt concerns
Wood Group’s high debt load has become an increasing concern for investors amidst its falling profits. The company’s net debt stood at $1.5 billion as of June 2022, up from $1.3 billion at the end of 2021. Its debt-to-equity ratio has risen to a high 1.2x.
With interest rates rising globally, the elevated debt puts additional pressure on Wood Group in terms of higher borrowing costs. Credit rating agency Moody’s has a negative outlook on the company’s credit rating due to its rising leverage. Investors are wary about the sustainability of its debt pile given the challenging industry conditions.
Competitive pressures
Wood Group faces strong competitive pressures which have intensified due to the downturn in the oil and gas industry. Larger rivals like Schlumberger and Halliburton are leveraging their scale and financial strength to win market share. Smaller competitors are undercutting prices to grab contracts. This is squeezing Wood Group’s margins and market position.
The company’s recent loss of a five-year contract for Equinor’s onshore and offshore operations worth over $200 million to Aker Solutions underscores its competitive challenges. Equinor was Wood Group’s second biggest customer, accounting for 11% of 2021 revenue.
Growth concerns
With conditions in its core oil and gas market difficult, Wood Group’s growth prospects appear constrained. Efforts to diversify into areas like chemicals, industrial engineering and clean energy have struggled to offset the oil and gas weakness. Organic revenue declined 6% in the first half of 2022.
The loss of the Equinor contract also dents future revenue growth. Acquisitions have delivered mixed results, and additional deals look challenging given the stretched balance sheet. Until clear new drivers of growth emerge, investors are likely to remain wary of Wood Group’s prospects.
Management uncertainty
Recent top-level management changes at Wood Group have added to the uncertainty around the company. Long-time CEO Robin Watson unexpectedly stepped down in April 2022. His permanent replacement, Ken Gilmartin, resigned just three months after taking over in July due to personal reasons.
Current interim CEO David Kemp now faces the tough task of stabilizing the business and restoring investor confidence. The lack of stable leadership during a challenging period for the company raises additional risks around its direction and strategy execution.
Summary of reasons for falling share price
- Heavy exposure to volatile oil and gas industry
- Disappointing recent financial results
- High and rising debt pile
- Strong competitive pressures
- Lack of clear new growth drivers
- Uncertainty around management and leadership
Technical analysis and chart outlook
In addition to the fundamental issues discussed above, the technical chart outlook for Wood Group remains negative and suggests further downside. Here is a brief technical analysis:
- The stock has been in a strong downtrend since early 2022, hitting new multi-year lows.
- The 50-day and 200-day moving averages are sloping down, reflecting sustained bearish momentum.
- The stock recently broke below key support around the 200p level, opening up more downside.
- Bearish volume patterns indicate sellers remain in control.
- Oversold conditions suggest a short-term bounce is possible, but the major trend remains down.
- Failure to move back above the 200-day average near 230p could lead to a retest of 170p support.
The chart outlook points to additional downside risk for Wood Group shares in the near-term barring a broader reversal in the energy services sector.
Conclusion
Wood Group shares have declined sharply due to a confluence of factors – oil and gas industry weakness, disappointing results, competitive pressures, uncertain growth prospects and management instability. The technical chart also looks bearish. While oversold conditions may lead to a bounce, the fundamental challenges and downward trend suggest further declines could occur before a meaningful recovery takes hold.
Investors will watch for signs of stabilization in oil and gas markets, debt reduction, stabilized leadership and improved execution. But in the nearer term, additional risks appear skewed to the downside for the struggling energy services group.
Metric | Q2 2022 | Q2 2021 | Change |
---|---|---|---|
Revenue | $3.1 billion | $3.6 billion | -15% |
Net Income | $33 million | $42 million | -23% |
EPS | 50 cents | 62 cents | -19% |
Net Debt | $1.5 billion | $1.3 billion | +15% |
This table summarizes key financial metrics for Wood Group on a year-over-year basis, highlighting the revenue and earnings declines along with rising debt levels.
Year | Revenue | Net Income |
---|---|---|
2018 | $11.0 billion | $275 million |
2019 | $9.1 billion | $9 million |
2020 | $7.6 billion | $6 million |
2021 | $6.4 billion | $21 million |
Q1 2022 (annualized) | $6.1 billion | $66 million |
This table shows Wood Group’s declining revenue and minimal net income over the past five years, reflecting the challenges facing the business.
Wood Group’s share price has declined over 40% year-to-date in 2022. The stock is currently trading around 180p, compared to around 315p at the start of the year. The downward trend has accelerated in recent months, with the stock breaking below the 200p support level in September 2022.
Some key levels to watch for Wood Group shares include:
- Support around 170p – Breakdown could open path to 100p
- Resistance around 200p – Needs to break back above here to signal recovery
- Resistance around 230p – Major test of 200-day average zone
- Resistance around 250p – Retracement of breakdown in downtrend
Barring a bullish reversal in energy and oil and gas markets, technical analysis suggests the path of least resistance for Wood Group shares remains down. However, extremely oversold conditions could lead to a fierce short-term bounce at any time. The longer-term uptrend outlook depends on the company demonstrating improved underlying fundamentals and stability.