Member Info for Lochnagary

Does anyone have any ideas on why this share has dropped so much in the last 10 days?

The recent update seemed very good.

Harbour said it still expects “to generate material cash flow at current prices”. Analysts said the sizeable debt pile would not hold back dividends. “Harbour is one of the largest independent upstream companies globally, with strong liquidity covering all sanctioned capital investments and underpinning shareholder distributions,” said analysts at Peel Hunt, who see the company’s yield remaining above 11 per cent for the next two years and adjusted earnings per share going from -2¢ to 58¢ between 2024 and 2025.

The shares dropped 14 per cent on these results, taking the year-to-date fall to 29 per cent. This seems like a buying opportunity for yield-focused investors, despite the volatile energy markets. Buy

Another strong performance. The interim dividend is increased by 35%.

I think they should reduce the dividend. They have to deal with the depressed oil / gas price that is now expected, not the higher oil / gas gas price they might have forecast a few months ago.

@Denziiil…thanks for the reply.

I’m sure Sidara will take account of the write down value in any offer. I think your $200m estimate is in the right ball park.

@Denziiil…re you figures, it’s worth noting that $815m of the $966m write down value was attributed to goodwill and intangibles, not physical things or cash.

It’s also worth noting that the share price barely moved after the these results were released on 20 August 24, sitting around 133p. So, although the value of the write down was high, the market didn’t appear to be concerned by the size of the number.

So, it may not have the linear impact on Sidara’s valuation of the business, which you suggest.

Https://www.investorschronicle.co.uk/content/cfd5882e-3971-53d6-b018-469b9b92ef41

Div up 15%…

I think the SP got slightly ahead of itself after the October announcement, and has drifted back from the all time high ever since. Hopefully, the numbers in tomorrow’s results will reflect the bullish sentiment in the October update, and take us to new highs.

They probably need to split the shares as well to reduce the share price, as £35 per share will put some potential buyers off. A 10 for 1 split would increase the number of shares by 10, and reduce the SP to £3.50.

The half year results for 2024, show that Wood spent £6 million on Sidara’s first bid (I know it never became a formal bid, but I’ll call it a bid for simplicity). That was only to the end of June 2024, so the final number for Sidara’s first bid (which ended in August) will be a bit higher. This shows us that it costs a lot of money to defend a bid, and Wood have had two bids in as many years. No wonder the debt is rising!

If they get taken over, the cost of Sidara’s second bid, won’t matter. However if they intend to rebuff Sidara, they should be mindful of the cost they will incur in a protracted negotiation, and look to bring discussions to a head quickly, (with the support of the key shareholders), so they don’t rack up another £6 million, when they are looking to conserve cash.

Part of the reason Wood is in a pickle, is that the bids from Apollo and Sidara, both consumed a huge amount of management time, time which would otherwise been spent managing the business. Entertaining Sidara a second time round, without having a CFO in place, is going to be a real challenge, and is likely to have a negative impact on the smooth running of the business. The business can’t afford another protracted distraction, so Ken & Co need to engage quickly and fully Sidara and the key shareholders, to see if a bid can be formalised. If an agreement cannot be reached quickly, Ken & Co need to get back to their day jobs.

If Sidara succeed in buying Wood, it appears that the ghost of AMEC will have come back to haunt them. Let me explain…if you look at Sidara’s website, you will notice that one of their non-executive directors is a gentleman called Neil Bruce OBE. Neil was the Chief Operating Officer of AMEC, before the ill-fated takeover of Foster Wheeler in 2014. Neil was based in Aberdeen and would know Wood, and their senior personnel well, through the Aberdeen industry networks. Neil will be well placed to advise Sidara on their discussions with Wood.

I think they would be better to hold a placing / rights issue as soon as possible, to strengthen the balance sheet quickly. They are unlikely to get a good price for any disposals they try to make, (it will be perceived as a fire sale) and it’s possible there won’t be any buyers. Even if they find buyers on reasonable terms, the deals could take a long time to complete, say 6 to 12 months. It also reduces the profit the group will make in the short term (assuming the companies they propose to dispose of are currently profitable). This will be important when they try to refinance their debt, as lenders will probably impose more onerous terms, as the group will likely have a poorer credit rating.

Far better, to bite the bullet, and raise capital from shareholders to reduce debt and strengthen the balance sheet. If a new CEO is appointed (which I think the institutional investors will insist on) he / she will want to strengthen the balance sheet, so the business is on a sound footing. There is no incentive for a new CEO to manage a company which is just surviving, and most of the profit is spent servicing debt. They need a strong balance sheet to deal with the financial risks that are inherent in types of work they engage in, to win profitable contracts and to give confidence to investors.

If they announce an intention to raise capital when the review is completed, this is likely to prevent a bidder getting the company on the cheap. If a bid is made, once the capital raise is complete, it will have to value the company more highly.

A capital raise will dilute shareholders unless they take-up their rights, or buy the equivalent in the market, but I think it is the best way forward for the company, and it will keep the company out of foreign hands. Far too many UK companies are being bought by overseas buyers because the exchange rate makes them attractive. Let’s not allow Wood to suffer the same fate.

I realise some people on this BB will have different views…so I’m interested to hear if anyone else thinks the same as me.

@hellodave. Rival removal…

When Wood bought AmecFW in 2017, the Competition & Markets Authority prevented them from buying AmecFW’s UK assets, because it would distort competition in the UK. So, if a company with a presence in the same UK business sector as Wood, (Worley, Jacob’s etc) were to buy Wood now, it is possible that the CMA would not allow them to buy Woods UK assets. The UK assets would therefore need to be sold to a non-industry player (private equity or management buy-out….don't laugh), or a new industry entrant to the UK market.

Apologies got your name wrong…butter fingers

Arson…yes it’s the same person.

So, key question: in whose interests was it to alert Wood, via the Financial Times? Short-sellers maybe, holding 4.4 per cent of its shares? Or one of its lending banks, seeking to destabilise the group amid its refinancing talks? Notably, Balan said his decision to go was “based on minimising distraction at this very pivotal time with our investors and lenders”. Or could Wood have actually known about his qualifications but used his overegged CV to push him out?

Perhaps that is a conspiracy too far, though Wood refused to say whether Balan would be getting a payoff. Whatever, unless Wood can land another bid, it’s now in crunch refinancing talks without a permanent finance chief, with Kepler analysts reckoning it “will be difficult to avoid a capital increase”.

How much? “$400 million” in their view, or twice Wood’s market cap. For a group with zero free cashflow, that’s debt-for-equity swap territory — even if it does have a $6.2 billion order book, is promising $450 million ebitda for 2024 and, at the half-year, had headroom on its net debt-to-ebitda and interest cover bank covenants. Even a real chartered accountant may struggle to make Wood’s finances add up.

Telling porkies on your CV typically gets you the job of chancellor of the exchequer. So, maybe, Arvind Balan has grounds to feel a bit hard done by.

In his case he was out the door at John Wood Group with “immediate effect”, losing his job as chief financial officer. And all because of the “honest oversight”, as he put it, in describing his “professional qualification as a chartered accountant instead of certified practicing accountant”: a lower class of number-cruncher in the view of some beancounters.

Still, you don’t have to be any sort of accountant to spot that something here doesn’t quite add up. True, fabricating your CV always raises questions about personal integrity. Yet, when you put Balan’s exit in the context of the financial mess Wood is in, the way the news was squirrelled out after the market closed on Wednesday night, the fact that the shares had already fallen 17 per cent to 24¼p before it was announced and the company’s complete refusal to discuss what’s gone on, one obvious question springs to mind: what exactly is the back story here?

Over the past two years few UK-listed companies have goofed up quite so spectacularly as Wood. Over that time, the Aberdeen-based consulting engineering group has let two putative cash bids slip through its fingers at the point of due diligence: first Apollo’s £1.66 billion tilt at 240p, then Sidara’s at 230p.

Then, having repeatedly promised to deliver “significant” free cashflow, it has come up with the opposite, culminating in this month’s shocker that the cash burn will be continuing until 2026. On top, an accounting review by Deloitte has identified the need to “strengthen significantly” the group’s “financial culture, governance and controls”.

Worse, a company that’s seen its market value drain away to a mere £180 million, on shares up 6 per cent yesterday to 25.8p, is running average net debt of $1.1 billion — all of which must be refinanced by October next year. Indeed, given all that, it’s a miracle that the chairman Roy Franklin, the chief executive Ken Gilmartin and Nigel Mills, the senior independent director, haven’t beaten Balan out the door.

Balan joined in only April last year, with one of his first acts totting up $983 million of half-year losses, mainly due to lopping $815 million off goodwill after Wood got out of large-scale projects. Not being a chartered accountant proved no bar to that bit of maths, or him holding down previous jobs as finance chief of Rolls-Royce’s aerospace wing or in senior roles at Shell. Rolls was aware of his real qualifications, so begging the question of how Wood’s headhunter Odgers Berndtson or its nominations committee, chaired by Franklin, somehow weren’t.

That’s an excellent video Dumbly…he is an excellent communicator. This should be compulsory viewing for MPs of all parties and the leaders of all government departments associated with energy policy.

Ice…re your comments on the article..”designed to spook the uninformed etc”

The article came from the Investors Chronicle, so I imagine that the author wrote the article on the premise that the readership of the magazine would have a slightly higher level of financial knowledge than the average member of the public, and indeed, many of the readers would be industry professionals, who would definitely understand the meaning of the term “current”, in the context it was used.

I don’t think you can criticise the Investors Chronicle, because you didn’t understand the meaning of the term, at your first reading of the article.

PS…I don’t work for the Investors Chronicle.

Kepler Cheuvreux note today

Avoiding a capital increase looks difficult

Wood negatively surprised the street again, issuing massive FCF burn guidance

for 2025 (while cash flow was said to be significantly positive up to now). As a

result, all refinancing options are now on the table. It will be difficult to avoid a

capital increase, in our view. While such an operation would need to be carried

out at a time when the group’s image and reputation have suffered, we estimate

c. USD400m would be required (twice the current market cap). In addition, the

independent review of the group’s accounts is not yet over, and it could be

extended to cover the previous year. We placed the name Under Review in

November (in response to the independent review) and move to Reduce now.

Key findings

? Wood has consistently surprised negatively on cash flow since mid-2023. Now, the

group expects USD150-200m of FCF burn in 2025E (guided to be significantly positive

up to now) and will again have to make significant disposals to keep debt flat.

? The majority of the group’s debt matures in October 2026. All options are on the

table for the refinancing, and we think it will be difficult to avoid a capital

increase. With USD500-550m of EBITDA over 2026-27E, deleveraging is unlikely to

be strong enough to establish a clear path to reduce debt (with free cash flow

close to zero after exceptionals). We think USD400m would ease the situation,

although it would likely come with a significant discount.

? Investors will likely have concerns about the investment case, especially after all the

M&A stories (Apollo and Sidara) and poor track record in terms of meeting targets.

? The group targets USD150-200m of disposals this year. We think this would

remove another c. USD40-50m from group EBITDA. Wood is in survival mood,

selling assets to keep net debt flat.

Resetting our model with 2027 numbers

? All numbers are before disposals. We expect the group’s top line to be close to

USD5.5bn in 2025 and c. USD6.2bn over 2026-27E.

? We see EBITDA close to USD485m in 2025E and USD550m over 2026-27E

? Net cash flow generation will be limited, close to USD20m over 2026-27E (and this

before disposals). Deleveraging is insufficient to avoid a capital increase, in our

view. Here again, c. USD400m would considerably ease the situation

Limited appeal at present

? We think a significant discount needs to be applied on any valuation

methodology for Wood, given: 1) the questions/doubts about M&A talks with

Apollo and Sidara; and 2) management’s recent weak track record in meeting

cashflow targets. We apply a 66% discount to our SOP, as we think a capital

increase is very likely (USD400m, significant dilution).

? With our historical SOP and cashflow yield approach, we derive an average value

of 20p. We have a Reduce rating on the name with a TP of 20p.