Friday Morning Coffee Nr. 117: From Oil & Gas to Energy Transition

270820 Friday Morning Coffee

Friday Morning Coffee Nr. 117: From Oil & Gas to Energy Transition

Referring to the telephonic conversation with the boss of a large US cruise line operator at the onset of Covid-19, the CEO of Tui (Anglo-German tours and travels operator) says “Shared pain is halved pain”. Fair enough, when the giants in the sector are bleeding then the entire value chain would bleed equally, if not more. But what if a company which had historically derived its income from a volatile segment of a sector has over the period diversified into growing and niche pockets of the sector? That is, in the downturn the magnitude of the impact is less severe than pure-plays in the sector and yet the company’s shares continues to trade in line with the sector?

The company we aim to discuss here is Wood Plc. It is a British technical service provider in the Energy and infrastructure build sector. Over the course of last decade, Wood has transformed itself into a well-diversified engineering services provider. In 2012, Wood generated 90% of its earnings from the commoditised and volatile segment of the Oil & Gas (O&G) value chain, and that contribution has come down to 35% as of 2019. The other source of revenue coming from a relatively more resilient downstream segment of O&G contributes 25%, whereas the high growth and the better margin of the renewable sector contributes 25% and it is growing, which leaves a sustainable infrastructure exposure to 15% of the group revenue.

The seed of this transformation was sowed back in 2012 when the current CEO of Wood plc, joined the company as head of its engineering division. One year into his new role as CEO, Mr. Watson made a major acquisition in 2017 of Amec Foster Wheeler. The rationale was to diversify away from upstream segment of O&G. Although the new acquisition gave Wood the needed diversification, it was however riddled with challenges. After all, why would it become an acquisition target, if it were to be a well-managed and profitable setup? Post the acquisition, the management team successfully de-risked, streamlined, and integrated Amec-FW. Wood plc as it stands today has much wider breadth of customers than what it was known to have in the past. As of 2019, its 2nd largest client is the US government and clientele includes names such as Glaxosmithklines.

But having a de-risked business model is not enough, what about growth? In order to answer that question we point to the slide Wood presented during its last capital market day.

source:  Wood Plc

The world faces a unique challenge. Over the next three decades the world population is estimated  to expand by a 3rd and infrastructure capacity is needed to expand by the similar magnitude. However, carbon foot print needs to halve. Where we stand today, the available technologies are not scalable enough to enable rapid transition from oil to greener source of energy to meet global energy demand. Hence, in order to meet the CO2 targets the companies and sovereigns around the world need not only invest in alternative source of energy, but continue to use fossil fuel with something called “Carbon-Capture” a niche expertise that Wood has developed over time. So, when the Danish wind-farm operator Orsted plans new investment it would employ the services of Wood or when a NOC want to set-up a carbon capture facility it would go to Wood and when US government would invest sustainable infrastructure it would need Wood’s knowledge expertise. We could give numerous examples, but the point we are trying to make is Wood is no longer a company operating oil-rigs in the North Sea.

In the table below we compare Covid-19 impact on the Wood Plc and its closest peers. We have intentionally left out asset heavy service providers and product manufacturer in order to maintain relevancy as the impacts have been very dramatic for some of those names.

Moreover, as the companies around the world are rushing to improve the liquidity to stay solvent in the Covid-19 world, Wood is paying back debt helped by solid cash generation by its resilient business model. 

Looking at the stock price of the Wood Plc, one can observe the thesis of technical chartist “Price has a memory” is at full display, but we are confident that in the time to come it would decouple from its historical trading pattern and trade at a premium to sector average