Member Info for Lochnagary

Ice…I think the loans are treated as current from an accounting point of view, one year before they are due to be repaid or refinanced. So, that means they would be treated as current from October 25, which is this year. So I think the IC words are correct.

Happy to be corrected if there are any accountants out there, who know differently.

Apologies if already posted:

Energy engineering and project specialist John Wood Group (WG.) has thrown a lot at shareholders in the past year. After a second buyer pulled out of a deal in August, the largest knock has come from a review of its previous treatment of “reported positions on contracts in projects, accounting, governance and controls” in November.

While the company has now said this won’t have any cash implications, there looks to be a separate deterioration in the business given management has shifted from guidance of “significant free cash flow” this year to an outflow of $150mn-$200mn (£119mn-£159mn). One analyst has previously called 2025 free cash flow the “underlying driver of the company”. Wood Group had previously told investors free cash flow would come in 2024.

The shares fell by another third on Friday morning, taking the 12-month drop above 70 per cent.

Some of the cash flow reversal is still down to incorrect accounting in the past – a deferral of $50mn in transfers from the pension surplus, and also $10mn in costs related to Deloitte poring over the books.

The company is also “actively managing working capital”, which will result in a $70mn working capital unwind this year. Another $30mn is down to Ebitda growth being less than expected this year. Offsetting this could be asset sales worth $200mn, while the company says positive free cash flow will now arrive in 2026.

Another test this year will be refinancing – the majority of Wood’s loans become current later in the year. The industry has a poor run of form in this space, given the balance sheet requirements for large project work.

Even if Wood has moved away from the lump sum projects and the hefty cash securities needed to secure them, which contributed to competitor Petrofac (PFC) sinking, the need to be “actively managing” working capital at the year end points to pressure on the balance sheet.

The company cancelled executive and employee bonuses as part of the push to “mitigate weaker-than-expected trading” in the fourth quarter. Also helping the books for 2024 was the completion of the sale of EthosEnergy on 31 December, knocking $138mn off the net debt figure. Net debt closed at $690mn, which excludes leases of $373mn and a $200mn receivable financing facility.

“While we have made progress, I am disappointed in our financial performance,” said chief executive Ken Gilmartin. “Consequently, we are taking decisive actions to ensure we can meet the opportunities we have in growing markets, principally energy.”

Sales in 2024 were $5.7bn, down from $5.9bn last year.

The size of the free cash flow shift for this year is enough to shift our optimism in the company bouncing back thanks to the headier energy investment environment. While the refinancing is yet another hurdle for management to leap. Move to hold.

Last IC View: Buy, 132p, 20 Aug 2024

Wiggly…I think the company would get a better price from a suitor if it wasn’t burdened with so much debt.

Personally, I would rather the company remained a British / Scottish company, with new management, than being sold. Once the balance sheet is cleansed of the legacy problems, they should have a good chance of being a successful company again. The exchange rate atm makes it tempting for foreign companies to acquire UK PLC on the cheap. That can’t be in the countries long term interest.

I think they will be able to refinance the debt, probably at a higher interest rate than they might like. However, given the size of their debt, the lumpiness of their cash flow, and the likelihood that exceptional costs will recur (as they do for most contractors), they will not be a strong company.

Therefore, I think it’s extremely likely that there will be a cash call on investors (rights issue and / or placing). With > $1b of debt, i wouldn’t be surprised if the would want to get the debt down to circa $500m ish, to set the business up for success.

The current CEO is toast, so I suspect that cash call will be one of the first things a new CEO would do. If the share price continues to be in the 30 to 50p range, this would be hugely dilutive to existing shareholders. I think is why a lot of people are selling.

I’m out…what a rotten company. The CEO, Chairmen, VP responsible for the offending business stream, together with the relevant project managers, should all be shown the door. And if there is any mechanism for Wood to recover shares or pension from the previous CEO and CFO, they should do that. The company is an embarrassment to Aberdeen, the NE and Scotland. Truly shocking.

Even if the review is not finished, the CEO & CFO must know the key findings to date, and be able to take an informed view on the impact the review will have (once completed) on the companies finances.

If the they think the final review will have a positive impact, neutral impact, or only a slightly negative impact, surely it would be beneficial to the company’s share price, for an interim statement to be issued to that effect. It can’t do any harm.

However, if they think the final review will have a significant negative impact on the companies finances, they may think it’s better to wait for the review to be completed, before issuing a statement. The thinking here would be that it’s better to get the bad news out at one time, rather than two separate announcements, weeks or months apart. The latter approach gives the market two opportunities to hammer the share price, instead of one opportunity (all in an ideal world of course).

So the lack of news, suggests to me that the review will have a materially negative impact on our financial numbers. The shorters may be coming to same conclusion.

I hope I’m wrong.

Woods financial years starts on 1st Jan, so H2 would mean that we would not get the results till after 1st July. That sounds ridiculous. If it’s true, we should all sell our shares in Wood immediately, as the uncertainty over the companies financial position is so great, and the confidence in the CEO and the CFO is so low, that the company is uninvestable. I sincerely hope your source is mistaken.

In a well run company, (indeed, any company) it cannot possibly take 7 months, to complete a review. If it does, the CEO and CFO should resign when the results of the review are published, as they are clearly not competent to hold these positions in a PLC.

Harbour is their favourite O&G stock.

Harbour Energy (HBR) voted with its feet in reaction to the previous government’s levying of a windfall profits tax, cutting UK development spending and then signing a transformational deal to take over Wintershall Dea’s Norwegian assets. This was facilitated by lower oil and gas prices, with Harbour chief executive Linda Cook saying Norwegian assets had previously been outside of her company’s significant price range. This year, Harbour sales will hit $10.6bn compared with $3.95bn in 2024, as per Stifel forecasts, although the dividend is expected to be flat. Adjusted earnings per share are expected to rise from 4¢ a share in 2023 to 21.7¢ this year.

It’s almost 3 months since the CEO announced that a review was required to address the auditors concerns, and I think our CEO has been remiss in not providing an interim statement to reassure his patient shareholders. I think his silence might tell us something though.

Before I set out my argument, I think we need to assume that the CEO and CFO must have a pretty good idea of which areas, contracts, projects, risks or assumptions have given the auditors concerns, and the nature of these concerns. This will allow them to prepare a Terms of Reference / Scope of Work for KPMG to get after. We also need to assume that KPMG will be fully briefed by the auditors, so that KPMG fully understand the auditors concerns, and can apply their professional expertise to addressing these concerns. Finally we should assume that Wood have, in conjunction with KPMG, set a target completion date for the review, and probably intermediate reporting milestones as well.

I’m not an accountant, but in the context of a business with a $6Billion turnover, I don’t think KPMG are trying to verify that the accounts faithfully record every dollar….that would take forever. If KPMG can do sufficient work to prove that the key financial numbers are correct, to within, say, a few hundred thousand $, that should give the company and the auditors sufficient assurance. So, three months should be sufficient time to do a substantial review (even though it may not be fully completed) and to get a good idea of the scale of any financial impact.

With this in mind, I would expect that the CEO should be able provide an interim update, telling the market when the review is expected to be completed, and possibly some comforting words on the likely financial impact of the review (suitably caveated, so he is not boxed in, when the review is finalised). The fact that Ken G has not done that, when he knows that a favourable interim statement would have a positive impact on the share price, suggests that the findings of the review may not be as favourable as we would all like (myself included). So, in summary, I don’t think his silence is a portent of good news. I’d love to be wrong.

According to the HBR website, the shares that BASF hold in our company are subject to a six month lockup period, with the clock starting on 3 September 24. This means that BASF could start to sell their shares from early March 25.

The prospect of these shares coming to market, may be contributing to the negative sentiment that surrounds HBR at the moment. Alternatively, our low share price may deter BASF from selling, as they will crystallise a substantial loss from the notional value of £3.60, which the merger was based on.

Does anyone have any thoughts on this?

More bad publicity for Wood this morning in the Times:

MPs urged to intervene in fight over pre-1997 pensions

https://www.thetimes.com/article/50140b76-1e1f-45cb-ad5a-45877201ba5c?shareToken=c14822dddc0ea77a712f7b952752e09c

“John Wood Group, the oil services group that owns the UK division of the old Foster Wheeler, has not made any discretionary increases for 22 years, the alliance said. Roy Davies of the Wood Group campaign, said “Our principal focus is protecting the interests of the secretaries, filing clerks, typists etc that we were so dependent on on the past and retired 20 -25 years ago, with mostly pre-97 pensions.”

Https://www.constructionenquirer.com/2024/12/10/start-date-for-vast-balfour-and-costain-carbon-capture-power-job/

Link from the Costain board, courtesy of Hamhamham1.

It appears that Wood are the project management contractor for a £4 billion carbon capture and storage project in the north east of England. Nice…

Ice…I have worked for Tier 1 EPC contractors in O&G for forty years, and I can tell you that the margins you have claimed are no longer achievable for a business like Wood. When I said engineering man-hours, I meant, engineering, management, supply chain, project services & construction man-hours. In addition, UK operators will allow a mark-up of 1 to 1.5% on supply chain, where Wood procure on behalf of the client. 18 to 22% is not realistic on major projects, or the business as a whole. Granted, that margin may be achievable on some selected projects, where Wood are able to use their low cost engineering centres in India or Asia, and their is no rework, but on the whole it is not achievable over the breadth of Woods business. Note that the personnel in low cost engineering centres typically don’t have the experience necessary to do many of the brownfield projects, which Wood will be doing, so cannot be deployed as frequently as might be expected. Sorry to be the bearer of bad news.

Ice…the margins on these contracts are nothing like 18 to 22%. Engineering manhours are a commodity, and on reimbursable work (which is Woods new operating model, having exited fixed price contracts), the margin is nearer 5%, sometimes less. Oil companies drive a hard bargain, and competition keeps pencils sharp.

James….i think the rise was something of a ‘relief rally’ that Wood would not be demoted from the 250. I think that big buyers did the same calculations as you did, on Wood being 7th bottom in the index, and decided to buy on the premise that one risk had been removed.

James…thanks for correcting me. I assumed that the LSE website would be correct at 10.30 pm. If Wood are indeed 7th from bottom, that would give us a much better chance of staying up, as I don’t think 4th bottom would have been enough. I guess the SP rise this morning also suggests that we are staying up.

James…if you look at the stock exchange website tonight, Wood is fourth bottom (MC £392M), Bellevue is fifth bottom (MC £397M). I don’t know if fourth bottom is sufficient to keep us in the FTSE 250. All will be revealed tomorrow.

@pokerchips…I disagree that they were obligated to advise they had commissioned an audit. As I have said before, they could have conducted the audit privately and only mention it, if it impacted the financial numbers in a material way. The CEO could have managed this better.

As an example…the approach of a potential takeover by Apollo, was only made public when something leaked. They didn’t disclose it when they were in initial discussions with Apollo. They only disclosed it when it became obvious from the SP movement that something had leaked. If it hadn’t leaked, Wood could have kept the discussions with Apollo much longer.

However, I believe that company’s are obligated to disclose things which may affect their profits…i.e. a profit warning. This review may, or may not result in a future profit warning, but at the moment it’s just a bit of financial review recommended by the auditors. We don’t know the context of the auditors concerns, and whether they are essential to the accounts being signed off, or a just a recommendation to implement best practice. So, my view is that the CEO has handled the issue in a way that has prematurely harmed shareholders interests. If the have to write-off another £100m over the next 2 years, that is not good, but it’s better than communicating that the company could be facing an unquantified black hole in their accounts. If you see what I mean.

@ pokerchips. I have no inside knowedge, so I don’t know if they have started. However, if Wood have to wait for weeks for Deloitte to provide the necessary resource, that just makes the CEO look even sillier for announcing the review when he did, without any idea of timescale.

@ pokerchips. It’s almost three weeks since the Q3 update. That is ample time for Wood to frame the scope of the review and agree a target timescale with Deloitte. You don’t engage a consultant without agreeing target dates for the preliminary findings and the final report. Given the importance of this review, there will likely be daily reporting to Wood management, so they can facilitate any requests for access to personnel and information etc.

So, by now, Wood should have a good idea of how long it would take. It would help the share price, if they communicated an indicative duration to the market, caveatted as they see fit. I’m guessing it would be 4 to 6 weeks. Any longer than that, and the market will start to think the worst. Remember, they are not trying to find discrepancies of thousands of £, they are trying to determine if there are any discrepancies in the millions to tens of millions range. Sums of that magnitude should not be difficult to trace in a well run company.