Wood Group is a major casualty of the slowdown in oil and gas upstream activity over the past five years. The company has racked up nearly $700m in net debt and is set for a year of negative free cash flow.
The green energy transition has ravaged Wood Group’s fossil fuel energy business. The decline in upstream spending has directly contributed to Wood Group’s demise. Investors, however, will be rightly critical of the company’s management of the situation.
Although the writing has been on the wall for more than a decade, Wood Group has only recently started to report substantive sustainable energy-related revenues.
Wood Group is doing really interesting things in hydrogen, carbon capture, LNG and waste-to-energy. Sustainable activities made up around 21% of revenue in the recent half-year period, and the company said its sales pipeline is around 40% sustainable solutions related. Some would argue that this is too little, too late.
Notwithstanding Wood Group’s weighting to fossil fuels and sustainable solutions, the immediate concern is the company’s poor financial position, which was highlighted by a trading update in February. Wood Group shares halved the day it was released.
Be under no illusion that the trading statement released in mid-February deserved the market reaction it got.
Wood Group is haemorrhaging cash and is being forced to sell off assets to plug an expected negative free cash flow of between $150m – $200m.
Negative free cash flow is a concern because it raises questions about Wood Group’s ability to manage and improve its debt situation. This is a major red flag and is the main contributor to the 80% decline in the Wood Group share price over the past year.
The company is in trouble. Macro influences have been unkind, and Wood Group could have handled the headwinds better. Adjusted EBITDA more than halved from $885m in 2019 to $423m in 2023.
However, those looking at shares at 26p and attempting to gauge whether now is a good time to buy must consider the future and whether the company has a clear path to recovery.
Shares are trading below 30p for a reason. Wood is struggling to generate cash, and debts are mounting. Cash generation is key to a rebound in shares. The company is disposing of assets to raise cash this year, but selling off assets isn’t a long-term solution.
Wood is undergoing a cost savings programme that is expected to reduce the cost base by around $145m between 2023 and 2026. Reducing costs will help improve cash generation, but the company desperately needs top-line growth.
Thankfully, the industry may just be turning in Wood’s favour.
The upstream fossil fuel industry is showing signs of increased investment, which will provide much-needed business for Wood Group.
After peaking at $814bn in 2014, annual investment in upstream oil and gas hit lows of around $400bn before steadily picking up to an estimated $580bn in 2024. Forecasters at the International Energy Forum see this increasing to around $780bn by 2030. A continued and steady increase in upstream investment would underpin Wood Group’s growth over the next five years.
Donald Trump’s approach to oil and gas will be welcomed by Wood Group executives.
Meanwhile, Wood Group continues to win new business from the world’s largest energy companies, including BP, Shell, and Saudi Aramco, and will likely beneift if these major players increase their activity. As an example, Wood recently announced a $120m contract extension with Shell to develop brownfield offshore and onshore assets across the UK.
There could well be a rewarding medium-term trade in Wood Group as bargain hunters step in the hope disposals go well, and cash generation improves. The longer-term picture relies heavily on the company’s ability to become free cash flow positive in the coming year and whether forecasts of an uptick in upstream investment come to pass.
This is a high-risk play for those investors who believe the oil and gas sector will contribute to the global energy supply for years to come but also see renewable infrastructure spending expanding.
Wood Group has attracted private equity interest in recent years. The recent decline may have some licking their lips.