WOOD GROUP (JOHN) PLC - Full year results for the year ended 31 December 2016

(http://www.woodgroup.com/investors/analyst-consensus/Pages/default.aspx)

Wood Group is an international energy services company with around $5bn sales and operating in more than 40 countries. The Group designs, modifies, constructs and operates industrial facilities mainly for the oil & gas sector, right across the asset life-cycle. We enhance this with a wide range of specialist technical solutions including our world leading subsea, automation and integrity solutions. Our real differentiators are our range of services, the quality of our delivery, the passion of our people, our culture and values. We are extending the scale and scope of our core services into adjacent industries. Visit Wood Group at www.woodgroup.com and connect with us on LinkedIn and Twitter.

For further information contact: 

Wood Group

Andrew Rose – Group Head of Investor Relations                                      01224 851 000
Ellie Dixon – Investor Relations Manager
Carolyn Smith – Group Head of Communications

Brunswick

Patrick Handley                                                                                      020 7404 5959
Charles Pemberton

There will be an analyst and investor presentation at the Lincoln Centre, 18 Lincoln’s Inn Fields, WC2A 3ED at 09.00.  Early registration is advised from 08.30.

A live webcast of the presentation will be available from www.woodgroup.com/investors/financial-information/financial-events-calendar

Replay facilities will be available later in the day.

Chair’s statement

Markets           

2016 represented a second successive fall in global E&P customer spending which was down over 20% following a similar reduction in 2015. Oil and gas markets remained very challenging; lower oil prices endured and activity fell across the sector. Early indications for 2017 suggest the potential for some modest increase in spending from 2016 levels, reflecting a recovery in North American onshore spending, largely offset by further reductions elsewhere for a third successive year.

Given the spending outlook for 2017 and the inherent lag of the impact on service company activity, we are cautious on the near term outlook for the Group. However, we remain positive on the longer term recovery.

Overview of 2016

The flexibility of Wood Group’s business model, market leading position and the impact of bolt on M&A were key to delivering financial performance in line with expectations. In particular, the management of utilisation and early and decisive actions taken on cost reduction and efficiency in 2015, which continued in 2016, partly mitigated the impact of the tough pricing environment and reduced volumes.

During the year, Robin and the executive leadership reorganised and repositioned the Group across Asset Life Cycle Solutions and Specialist Technical Solutions. This organisational change is reflected in our full year results and our revised reportable segments mirror the new operating structure.

Together, the impact of structural cost reductions and the organisational change will help ensure that Wood Group emerges from this prolonged downturn as a stronger, better business in an oil & gas market that has recalibrated to a lower for longer commodity price environment.

Dividend

The Board has recommended a final dividend of 22.5 cents per share, which makes a total distribution for the year of 33.3 cents, an increase of 10% in line with previously stated intentions. The dividend cover ratio was 1.9 times (2015: 2.8 times). Following successive 10% annual increases in the dividend, we intend to pursue a progressive dividend policy going forward, taking into account cash flows and earnings.

Ian Marchant, Chair

Chief Executive’s review

Note: The commentary below on trading performance is presented based on proportionally consolidated numbers, which is the basis used by management to run the business. Total Revenue and Total EBITA include the contribution from joint ventures. A reconciliation to statutory numbers is provided in note 1 to the accounts.

Financial performance in 2016 reflected lower volumes and pricing pressure.  The Group delivered EBITA of $363m in line with expectations, down 22.8% on 2015. Adjusted EPS of 64.1c was down 23.7%. EBITA margins fell 0.6%. The impact on EBITA was partly offset by robust management of utilisation and decisive action on cost, with headcount down 18% and overheads down a further $96m.

EBITA also benefitted from the impact of commercial contract close outs on significant and legacy projects of around $15m in Asset Life Cycle Solutions Eastern Region and $14m in Specialist Technical Solutions. Due to the nature of the contracts that completed and the current outlook we do not anticipate that this will repeat in 2017.

Safety remains our top priority. In 2016, whilst there were some areas where we had excellent safety delivery, the overall picture across the business was one where safety performance remained broadly static but we saw an increase in high potential incidents. Looking ahead, we have immediate plans to draw together safety initiatives and ideas generated across the business to improve our programmes.  In the Gulf of Mexico, we have entered plea agreements in respect of investigations into certain events in previous years. The plea agreements, which are subject to approval by the court, provide for the payment of fines and penalties, as well as a compliance plan which is still to be finalized. We have taken significant steps to protect against any recurrence. Costs associated with the potential outcome were provided in 2015.

In February 2016, I set out my vision for Wood Group; to be recognised as the best technical services company to work with, work for and invest in, with a relentless focus on excellence.  The Group focussed on the short term challenges of cost efficiency and utilisation and positioning for a prolonged period of lower oil prices.  We made significant progress against my initial objectives; to ensure our business was appropriately structured to improve delivery to customers; to continue to generate sustainable cost savings; to develop our best talent; to continue to invest both organically in innovation and through acquisition; and to create value for shareholders.

We reorganised and repositioned as One Wood Group, refining our operating structure to enhance customer delivery. We moved to an organisation defined by service provision, with the intention of ensuring that customers understand the breadth of our offering across Asset Life Cycle Solutions and Specialist Technical Solutions. The change increases our effectiveness by enabling easier customer engagement, generates efficiency gains as a simpler business with less internal complexity, and better positions the Group to develop smart solutions.

Asset Life Cycle Solutions accounts for c 90% of revenue and has a Western and Eastern Hemisphere management structure.  Specialist Technical Solutions is a smaller discrete business unit that pulls together specialist and niche offerings to ensure they receive appropriate executive attention, investment and strategic direction.

The organisational change has been welcomed by customers and the benefits are already being seen in a number of live bids and contract awards. Our combined experience in pipelines and facility operations & maintenance was key in securing the operatorship scopes for the CATS and SAGE systems. More generally, renewals and awards from some of our largest customers owed much to the improved visibility of our broad offering, including our growing Automation service line, and One Wood Group delivery model.

Following a sustainable overhead cost reduction of $148m in 2015, we reduced overhead costs by a further $96m in 2016. This has meant further tough decisions which directly impact our people. Underlying headcount, excluding acquisitions, is down 36% over a two year period. As expected, the pace of saving has slowed, although we believe the savings achieved are sustainable into 2017.

We recognised exceptional costs of $140m net of tax in 2016. This included $89m in respect of the restructuring of and a further impairment in the carrying value of our investment in EthosEnergy. We are actively pursuing our longer-term strategic options for EthosEnergy, which include a possible disposal of our interest. We recognised a charge of $51m net of tax relating to reorganisation, delayering and back office rationalisation in our core business as we took actions in response to the tough market.

There is no change to our appetite or focus on M&A. Opportunities have been less than anticipated in 2016 and we have remained disciplined as regard to potential targets. We continue to focus on opportunities that may better consolidate our offering or accelerate delivery against our strategic objectives, including broadening our end market exposure.

The Group continues to benefit from a strong balance sheet and we are comfortable with the flexibility, diversity and maturity of our funding. Ongoing dividends, organic investment and M&A remain our preferred uses of cash.

Outlook

Financial performance in 2016 reflected lower volumes and pricing pressure. This was partly offset by the robust management of utilisation and decisive action on costs, significant one off benefits and the contribution from bolt on acquisitions completed in 2015.

We are cautious on the near term outlook for the Group, although customer support for our services remains strong. In a competitive pricing environment, we secured a number of renewals and new awards with some of our largest customers. This gives us confidence that our reorganised business is well positioned to support customers in a lower for longer environment.

Overall, the oil & gas market continues to present challenges in 2017. We anticipate modest recovery only in markets such as US onshore and greenfield offshore projects.  2017 performance will reflect the current pricing environment for work which remains competitive, although we believe our cumulative overhead cost savings since 2015 will be sustainable in 2017.

Our market position remains strong. I am confident that our focus on delivering value through our Asset Life Cycle Solutions and Specialist Technical Solutions together with our customer relationships, global footprint, and strong financial footing position us well over the longer term.

Robin Watson, Chief Executive

Asset Life Cycle Solutions Western Region

Revenue in 2016 was broadly flat with 2015 due to the contribution from businesses acquired in late 2015 offsetting underlying revenues that fell by over 15%. Despite significant pricing pressure, margin fell by only 1.6%, due to robust and decisive management of utilisation and cost.

Operations and Maintenance work accounted for around 70% of revenue and was up on 2015 due to the contribution of Infinity and Kelchner acquired in 2015. Our US onshore business was significantly impacted by the tough market but remained the largest contributor to this service line in the West. We saw a good contribution from our work in the Gulf coast petrochemical market following the acquisition of Infinity. Performance in East Canada improved significantly. We continue to work on our hook up and commissioning scope on the Hebron topsides and we secured a five year contract on the Hibernia platform.

Projects and Modifications accounted for around 30% of revenue and was down on 2015. US onshore work was the largest contributor to revenue and included the ETC Dakota access pipeline, the Flint Hills refinery project and activity on process plants and transmission pipelines more generally. Activity in greenfield offshore remained in line with prior year and included the detailed design on Stampede for Hess and Peregrino 2 for Statoil, completion of the FEED and commencement of the detailed engineering for Noble Leviathan and ongoing FEED activity for Anadarko Shenandoah. We also commenced detailed engineering for Kiewit on the BP South Pass Platform expansion project in the Gulf of Mexico.

Outlook

There are early signs of improvement for our Operations and Maintenance services in the core US onshore market where we have a breadth of capability across the Permian, Eagle Ford, Marcellus & Utica and Bakken basins. Rig count increases are beginning to have a modest impact on activity.  In Projects and Modifications, a number of large projects reached conclusion in 2016 including Flint Hills and Stampede.   However, we believe we have increased our market share in the greenfield topsides market albeit in a tougher pricing environment. 

Asset Life Cycle Solutions Eastern Region

Revenue in 2016 fell 26%, principally due to a significant reduction in brownfield modifications work in a very subdued North Sea market. EBITA fell 34% reflecting lower activity, the tougher pricing environment and foreign exchange headwinds, despite the offsetting impact of commercial contract close out on significant and legacy projects of around $15m and further reductions in overhead costs.

Operations and Maintenance accounted for around 60% of Eastern Hemisphere revenues. We faced a tough market in the North Sea, which was down on 2015. We maintained our leading position, having renewed a majority of contracts over the last 18 months that secures access to work as activity levels recover in the longer term. Our duty holder scopes operating both the CATS gas plant and pipeline for Antin Infrastructure and the SAGE gas plant and pipeline for Ancala Midstream demonstrate our strong capability to partner with new entrants to the basin.  Elsewhere, activity levels increased on our Exxon contracts in Papua New Guinea, and in Australia we renewed our contract with Melbourne Water. We also secured a five year managed services scope from Hess Malaysia for their offshore facilities in the North Malay basin.

Turbine related Operations & Maintenance activity was down on 2015. We saw weaker than expected performance in our EthosEnergy joint venture with reductions in major maintenance and equipment sales.  This has impacted our longer term view of performance, resulting in an impairment of the carrying value of our investment in EthosEnergy.  We are actively pursuing our longer-term strategic options for EthosEnergy, which include a potential disposal of our interest.

Projects & Modifications accounted for around 40% of revenues. We completed the later stage follow-on engineering and construction support scope on Det Norske’s Ivar Aasen project. In the UK North Sea, we experienced a significant fall in brownfield modifications and upgrade activity under existing contracts. Activity on our Saudi Aramco contracts grew and we renewed our General Engineering Services Plus frame agreement in the second half of the year. Work with Exxon in Iraq and BP in Azerbaijan is ongoing, although the pace of activity has been slower than anticipated. In Kazakhstan, we saw strong activity on our work with NCOC.

Outlook

Activity levels in the North Sea Operations, Maintenance and Modifications work are not anticipated to improve significantly in 2017, and results will reflect the margin impact of renegotiated contract renewals secured in 2016. We do expect higher activity elsewhere, with customers including Hess in Malaysia and Exxon on PNG.  We have low visibility on larger greenfield projects work in the East and the market generally remains weak, following the completion of a number of projects in 2016 including Ivar Aasen.  The Middle East market presents the greatest opportunities for Projects and Modifications in 2017.

Specialist Technical Solutions

Financial performance in Specialist Technical Solutions reflects a significant reduction in Subsea activity, partially offset by robust activity in Automation and the contribution of ATG acquired in September 2015. Despite a tough pricing environment, commercial contract close out on significant and legacy projects of around $14m, the release of deferred consideration provisions for acquisitions in the second half of the year and the impact of cost reduction initiatives resulted in an increase in margins.

We have seen significantly reduced Subsea services activity. We are working on a number of early stage, tie back and verification scopes, but there are minimal large projects coming to market. Relationships with our customers remain positive, evidenced by a number of master service agreements secured with Statoil, Apache, BP and Chevron, albeit at lower margins. Within our technology offering, we saw growth in our smart asset integrity and clean energy services.

Following our engagement on early stage engineering, we were formally awarded the $700m main automation contractor scope for Chevron’s Tengiz expansion project in 2016, and this was followed up with a $40m award from ExxonMobil Chemical to provide main automation contractor services for a Texas polyethylene plant following completion of the FEED work.

Outlook

The subsea market remains very subdued for larger projects and it is likely there will be lower activity in 2017. We have strong visibility for our Automation activity that is expected to grow following a number of awards and we also see good opportunities for our clean energy offering within our technology business.

Financial Review

Trading performance

Trading performance is presented based on proportionally consolidated numbers, which is the basis used by management to run the business.  Total Revenue and Total EBITA include the contribution from Joint Ventures.  A reconciliation to statutory measures of revenue and operating profit from continuing operations excluding joint ventures is included in note 1 to the Financial Statements.  

The review of our trading performance is contained within the Chief Executive Review. 

Reconciliation to operating profit

The table below sets out a reconciliation of EBITA to operating profit per the group income statement before exceptional items. Operating profit on a post exceptional basis by segment is included in note 1 to the Financial Statements.

From half year 2017, it is our intention to use Operating profit (pre-exceptional items), as set out in our Group Financial Statements, rather than EBITA as our key financial performance measure.  We have chosen to move to Operating profit in order to make our performance measures more straightforward and to remove the need the for additional reconciliations to statutory measures.

‘Like for like’ trading

The financial performance of the Group, adjusting for acquisitions and on a constant currency basis, is shown below. The 2015 results have been restated to include the results of acquisitions made in 2015 (Infinity, Kelchner, Beta and ATG) as if they had been acquired on 1 January 2015 and also to apply the average exchange rates used to translate the 2016 results. The 2016 results have been restated to exclude the results of acquisitions made in 2016 (SVT and Ingenious).

Amortisation

The amortisation charge for 2016 of $104.3m (2015: $109.0m) includes $49.9m (2015: $54.2m) of amortisation relating to intangible assets arising from acquisitions. $38.7m (2015: $26.6m) of the charge relates to businesses acquired by Asset Life Cycle Solutions West including Infinity, Elkhorn and Mitchells.  Amortisation in respect of software and development costs was $54.4m (2015: $54.8m) and this largely relates to engineering software and ERP system development.

Included in the amortisation charge for the year above is $2.0m (2015: $1.9m) in respect of joint ventures.  

Net finance expense

Net finance expense is analysed further below.

Interest cover⁴ was 14.1 times (2015: 20.3 times).  

Included in the above are net finance charges of $2.4m (2015: $2.3m) in respect of joint ventures.

Taxation

The effective tax rate on profit before tax and exceptional items including joint ventures and discontinued operations on a proportionally consolidated basis is set out below. 

The tax charge above includes $12.4m in relation to joint ventures (2015: $17.4m).

The Group’s effective tax rate is likely to reflect a degree of volatility in the near term, principally due to potential changes in the US tax regime. A significant proportion of the Group’s income is earned in the US, but the Group also has material deferred tax assets in the US that would need to be revalued should there be a change in the US tax rate. The impact of any change in US rate is therefore difficult to predict at this stage.

Exceptional items

At 31 December 2016, the Group carried out an impairment review of its investment in the EthosEnergy joint venture. The recoverable amount of the investment of $100.0m is lower than the book value and an impairment charge of $56.7m has been booked in the income statement. In addition, the Group has impaired its receivables by $2.4m in relation to a balance due by EthosEnergy and a provision of $29.9m has been recorded by EthosEnergy relating to redundancy costs and the closure of certain operations at the end of 2016. See note 10 for further details. The EthosEnergy impairments are recorded in the Asset Life Cycle Solutions East segment.

As a result of reorganisation, delayering and back office rationalisation, an exceptional charge of $65.9m has been recorded in the period.  $27.5m relates to redundancy costs incurred as people have left the business and $38.4m relates to onerous lease provisions in relation to property.

A tax credit of $15.1m has been recorded in respect of the exceptional items included in continuing operations.

Earnings per share

Adjusted diluted EPS for the year was 64.1 cents per share (2015: 84.0 cents). The average number of fully diluted shares used in the EPS calculation for the period was 382.9m (2015: 379.3m). 

Adjusted diluted EPS adds back all amortisation.  If only the amortisation related to intangible assets arising on acquisition is adjusted and no adjustment is made for that relating to software and development costs, the figure for 2016 would be 53.5 cents per share (2015: 73.3 cents).   

Dividend

The Board is recommending a final dividend of 22.5 cents per share, an increase of 10%, which, when added to the interim dividend of 10.8 cents per share makes a total distribution for the year of 33.3 cents per share (2015: 30.3 cents), a full year increase of 10%. The dividend is covered 1.9 times (2015: 2.8 times) by adjusted earnings per share.  

Going forward we intend to pursue a progressive dividend policy going forward, taking into account capital requirements, cash flows and earnings.

  Cash flow and net debt

The cash flow and net debt position below has been prepared using equity accounting for joint ventures, and as such does not proportionally consolidate the assets and liabilities of joint ventures.   The gross and net debt figures including joint ventures are given below.

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