Barclays’ analysts have reassessed the oil and gas services sector following the plunge in crude prices and ongoing disruptions caused by the Covid-19 coronavirus pandemic.
The bank’s analyst team reckons the unprecedented turmoil may become transformative to the nature of the industry – potentially accelerating transition in the energy market.
“The simultaneous demand drop caused by COVID-19 has been compounded by a supply battle between major producers,” analyst Mick Pickup said in a note.
“The industry will endure, in our opinion, but it could look considerably different.
“The typical demand creation of low prices has been halted by unprecedented travel and consumption curtailment, which could give a glimpse at a feasible enviro-utopia – less travel, less consumption, less waste.
“With it the energy transition is ironically accelerated, in our opinion.”
The market now moving towards Wood
Moving to ‘overweight’ the bank highlighted that recently perceived disadvantages against Wood would potentially go into reverse.
“One of the main arguments that we had against Wood since its creation was that the new business model was not exposed to oil & gas to the same extent as others within our space. Its oil & gas exposure is just 35%,” Pickup said.
He added: “In the current environment Wood ticks a lot of boxes for us operationally – it is asset light, low lump-sum exposure and includes a ca US$4bn turnover green business that is embedded within operations.
“This should make it attractive to investors.”
The caution noted by Barclays, meanwhile, is Wood’s debt, cost management and cash flow in the coming years (the bank notes that recent trends were driven by asset disposals that won’t recur).
In summary, though the Barclays analyst noted that: “The next few years are no longer about margin recovery and debt pay down, rather it’s about relative margin strength and debt stabilisation, which should differentiate it from other more at-risk OFS stocks, in our opinion.
“It has no imminent debt issues, with US$1.4bn of undrawn facilities, cash coming in from divestments and its US$1.75bn RCF not due until May 2022.”
Hunting prey to sharp slowdown
Barclays cut Hunting to ‘underweight’ and sliced the price target to 260p (current price: 165p) whilst highlighted that the group is particularly exposed to higher cost operations.
“With 90% of revenues coming from the US and largely dominated by shale-related activity, the company faces a sharp slowdown in activity,”
Barclays added: “we see Hunting’s Titan and US businesses both approaching levels of revenues seen in 2016 in 2021F.
“Such reduced levels of activity will put stress on margins, with Titan reporting a loss at the operating level in 2016 when conditions were tough as well.
“However, with recent improvements in efficiency, we believe costs are under control and the company nears but does not cross the breakeven threshold as we go forward.”
Barclays, meanwhile, noted that Hunting had begun 2020 with a cash-positive balance sheet and it has weathered market pullbacks before. Hunting has consistently been conservative, so Barclays is expecting the group to adapt.