ii view: a solar win for Wood Group

Alternative energy wins should help compensate for challenges at its oil and gas customers. 

Solar contract wins

Executive Stephanie Cox said:

"These contracts build on a 10-year relationship with our client, for whom we've executed more than 40 projects. The awards are testament to our ability to maintain consistent project execution, deliver to accelerated construction schedules and bring forth a strong EPC proposition and skilled workforce to meet our client's project goals.

"We are seeing an unstoppable momentum towards a lower-carbon energy environment and Wood is proud to partner with clients that are committed to investing in a sustainable energy future."

ii round-up:

Global engineering and consulting company Wood Group (LSE:WG.) today announced that it had won two major US solar contracts for an unnamed power & energy customer worth over $200 million. 

The contracts add to the company’s renewable energy business and should help offset some of the difficulties being faced by its oilfield services operation. 

Wood recently secured other contracts including a $100 million deal for onshore wind projects.  Its expertise stretches from innovative pipeline design to wind turbine and solar and tidal energy. 

Wood shares rose by more than 10% in UK afternoon trading, having fallen by around 40% year-to-date. Shares of rival oilfield services group Petrofac (LSE:PFC) are down by a similar amount in 2020. An early year supply disagreement between major producers Saudi Arabia and Russia combined with the huge hit to demand from the corona crisis, has left the oil price floundering in 2020. 

Wood has now delivered over 200 solar projects globally. These newly-won 190-megawatt projects in the state of Virginia will see its US renewables business double in 2020. 

In 2017, Wood bought rival Amec Foster Wheeler for £2.2 billion, then sold the newly combined group’s nuclear and industrial services businesses to reduce debt. 

In early April, as the Covid crisis unfolded, management cancelled the final 2019 dividend of 23.9 US cents per share, conserving $160 million of cash. A review of policy is expected once the outlook has become clearer.  

A trading update is due on 19 June. 

ii view:

A strategy to align Wood Group with the growth opportunities in energy transition and sustainable infrastructure is being pursued. These latest US contract wins continue to build on management’s goal.  But volatility in the oil price and its impact on the group’s customers still matters.  It previously extended a contract with Saudi Aramco’s subsidiary, Aramco Overseas. 

For investors, the recent scrapping of its 2019 final dividend payment is a blow, blunting a major attraction. The outlook for the Covid pandemic, the possibility of second waves and the direction of the oil price continues to overshadow. However, the company’s push to diversify is progressing while debt has been reduced. For now, long term investors may want to wait for further evidence of progress before adding to any existing holdings in this increasingly interesting alternative energy play. 

Positives: 

• Winning alternative energy contracts
• Cost savings of $60 million aided 2019 profit performance

Negatives:

• Revenue for 2019 declined by 1.2% to $9.89 billion
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Strong buy