U.K. Oil Services Offer Value as Crude Stays High, Analysts Say

Oil service companies such as John Wood Group Plc (WG/) and Petrofac Ltd. (PFC) may offer value as orders rise and oil prices remain high, said investors and analysts.

All but one of the five members comprising the oil services sub-index of the U.K.’s FTSE 350 group saw orders increase in the first-half compared with a year earlier, according to company filings. Shares in London-based Petrofac, Wood Group, and Amec Plc (AMEC) have all set record highs this year.

“The engineering expertise of these companies is becoming ever more important, so you’re getting higher margins as well,” Nigel Yates, who manages 1 billion pounds ($1.63 billion) of equities at NFU Mutual Insurance Ltd. and holds shares in Wood Group and Hunting Plc (HTG), said by phone. “You’ve got the constant need for more wells to be drilled.”

Crude has risen as much as 34 percent this year to $126.65 as war in Libya sparked concern that supply may be restricted. Global oil consumption will increase by 1.6 million barrels next year, according to a report by the International Energy Agency on Aug. 10. Oil producers will spend more on services as long as the commodity stays above $80 a barrel, according to an Aug. 8 note by Bank of America Corp.

“We are still in a high-oil-price environment, and this has generated a number of projects, be it exploration or production and development projects,” Thomas Thune Andersen, chairman of Lloyd’s Register and a Petrofac board member, said in a telephone interview. “The overall trend is still for a huge demand for oil and gas products.”

Hunting, Wood Group

Hunting, which sells casing for wellbore construction and holds stakes in more than 70 oil and natural gas producing projects, has seen orders increase this year, Jeremy Garcia, a company spokesman, said yesterday. Wood Group Chief Executive Officer Allister Langlands said last week its order backlog is as much as 15 percent higher in value terms than a year earlier. The company reported a 17 percent increase in first-half revenue to $2.83 billion on Aug. 23.

“A strong order backlog leaves a company, in these slightly more uncertain times, better positioned,” Ben Snow, an analyst at Investec Securities who rates Amec, Hunting and Petrofac a “buy,” said by phone. “The greatest risk for these companies is really movement in the oil price.”

It would take a prolonged plunge, “much lower” than $80 a barrel, to make a significant dent in earnings for Lamprell Plc (LAM), an Isle of Man-based rig engineer active in the Middle East that may hire as many as 1,000 more workers after first-half sales doubled, according to its Chief Executive Officer Nigel McCue.

Oil Prices

“Many of the projects we’re involved in are long-term in nature, and they are, in effect, unresponsive to oil prices in the short-term,” McCue, whose order book value climbed by 4 percent to $869 million, said in a phone interview. “If the oil prices were to go significantly lower in the long term it would have an effect, but we are not seeing any evidence of that.”

Oil may fall to $100 a barrel during the second-half of this year and to $86 in 2012 as slower global economic growth reduces demand, according to an Aug. 23 report by Citigroup Inc. analysts. Slower growth may also delay new projects for the industry in the next year as financing costs rise, London-based UBS Securities analyst Amy Wong wrote in an Aug. 11 note.

U.K.-listed oil service companies have fallen 13.5 percent during the year, compared with a 10 percent drop in the FTSE 350 index. The oil service sub-index surged 120 percent between 2007 and 2010 as the benchmark gauge lost 4 percent.


BlackRock Inc. (BLK), the world’s biggest money manager, said last month its holdings of U.S. service companies such as Schlumberger Ltd. and Halliburton Co. are good bets as the pressure to meet global demand may allow them to charge more even if oil prices slip further. The BGF World Energy Fund has beaten the MSCI World Energy Index every year except two since 2002.

“As long as the global consumption of hydrocarbons remains where it is, then the demand for our products will remain,” Peter Rose, chief finance officer at Hunting, said in a telephone interview. “We’re not seeing a decline -- the oil price is still at a level where operators can make a margin.”

To contact the reporter on this story: Charles Mead in London at cmead11@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net

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