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There have been murmurings recently that the boom in oil services is coming to an end. Sceptics have pointed to the relatively modest performance of stocks in the sector at a time of record oil prices. Given the wider, potentially justified, doubts about the sustainability of an oil price of $100 or more, the theory is that a retreat in the price of oil will puncture the buoyancy in the sector. In one sense this is correct – if the oil price falls the share prices of oil service companies will also fall but, beyond the short term, scepticism about the sector is unwarranted. There is no doubt that the fundamentals of supply and demand support a bullish stance and it would be extremely shortsighted to ignore the fact that there are still substantial rewards on offer in this super cycle.

Alejandro Demichelis, who covers pan-European oil services for Merrill Lynch, says: ‘We have been positive on the sector for quite some time, believing that the structural issues the oil industry is facing are playing to the benefit of the oil service companies.’

The oil industry has been through ups and downs throughout its history – with the volatility of the oil price leading to periods of both over-investment and under-investment.

While it would be foolish and arrogant to fall into the familiar trap of believing ‘it’s different this time’ the evidence suggests that the cycle will be ‘longer this time’.

A longer boom

The current upswing, which began around 2004 has already matched the three or four-year booms we have seen in the past. And there are signs that it continues to be sustainable. Not least because the oil producers’ spending commitments tend to be mapped out several years in advance. With contracts as a rule tending to be two or three-year affairs.

Seymour Pierce analyst Peter Hitchens says: ‘The market is underestimating how long this cycle is going to last and just how much money the oil services firms can get out of the oil majors.’ In this context it is not difficult to identify reasons to be positive about the medium-term future of the sector.

The recent results season, for example, is indicative of its current strength. Nearly all the prominent names in the sector surprised on the upside with their numbers – to such an extent that when Wellstream came out with an update that was ‘solid’ rather than spectacular it was battered by both the analyst community and the market alike.

Perusing the outlook statements that accompanied these results is also instructive. Petrofac pointed to ‘strong growth in the medium term,’ Wood Group said it saw: ‘continuing strong growth,’ Lamprell said that the high oil price and imbalance between supply and demand ‘provides us with a high level of confidence that the current market conditions will prevail for some considerable period of time’.

The amount paid for use of a rig is another key metric in understanding the health of the industry. As evidence of strong rig rates, Transocean has announced that it has awarded Royal Dutch Shell a potential three or four-year extension on the Deepwater Nautilus, its ultra deepwater semi-submersible rig. This will be renewed at $586 million or $759 million. Which equates to approximately $525,000 a day.

This does not indicate the downturn predicted by some when the largest global oil services operator, Schlumberger, often seen as a barometer of the industry because of its reach, unveiled disappointing results in January. Indeed at an energy conference earlier this month the firm’s CEO Andrew Gould gave a very upbeat presentation on its prospects. Schlumberger believes that current investment levels are insufficient to stem production decline and develop new resources. The company has also noted that a new wave of exploration has begun, which is currently only in the seismic phase – drilling will pick up too and any new rig capacity will be immediately seized upon. A continuing concern, raised by Gould, is the lack of qualified personnel, something that is limiting capacity. Overall, though, the group expects to see continuing growth beyond 2010.

These capacity constraints, allied to the earnings potential on offer in the sector, continue to fuel talk of consolidation. We saw two major deals last year and the evidence points to a continuation of that trend – Expro International, for example, has revealed a preliminary approach thought to be from private equity firm Candover Investments.

But there is no doubting the veracity of the case made by Schlumberger. It is not a self-serving account to put a fire under the company’s share price.

The majors have to spend money, and they have money to spend. Royal Dutch Shell has increased its exploration spending by around 250% in the past three years, and the other big integrated players haven’t been too far behind. BP’s massive buyback programme of recent years has come to an end, and the company now has to decide if it just wants to give money back to shareholders or seriously reinvest in the business with the aim of building its reserve base and portfolio. Noises from new broom Tony Hayward suggest the latter is more likely.

Services stronger than drillers

Yet all this spending is seemingly not enough to have more than a negligible effect on sustaining the reserve base of big oil companies. They will have to spend ever greater sums and the oil service providers will benefit.

A key reason why the chief executives of these companies probably go to bed with the term ‘reserve replenishment rate’ imprinted on their eyelids is the ascendancy of the national oil companies

This has really exacerbated the squeeze on the majors – the supply of conventional reserves on offer has substantially diminished and as a result they are spending more money to explore and develop in the provinces open to them. The dominance of the likes of Gazprom and Saudi Aramco has no such consequences for oil service providers, however.

Joanna Craig, analyst at Oriel Securities sees the super cycle in oil services lasting until at least 2010. She says: ‘An oilfield service provider is in the unique position of having access to 100% of the world’s resources because, while the national oil companies don’t need a middle man in terms of producing the oil, they still need the equipment and services offered by the experts in the oilfield service arena to drill, develop and produce their assets.’

The spoils from this investment will not be shared equally. And at this point it is worth defining the different sub-sectors that operate underneath the oil services umbrella. There are four main categories, which are perhaps best defined by the services they offer the producers and explorers.

First, there are the seismic and survey companies that provide guidance on where to drill, Offshore Hydrocarbon Mapping being perhaps the best example on the UK market.

Then there are the drillers – there is no clear exposure to this part of the industry in the City – Abbot Group, which would have been the obvious fit in this category, was taken out by private equity firm earlier this year. UAE-based Lamprell, which both refurbishes old and increasingly builds new rigs for the industry, is perhaps the most exposed to the rig market.

Beyond simply supplying rigs to explorers, though, a number of firms provide services associated with drilling. These services can range from the actual hardware involved in spudding wells – drill bits, drill pipe, casing tools – to services such as pumping, cementing, perforating, testing, logging and production facilities.

Engineering and construction

The final key sub-sector in oil services is engineering and construction. This involves the planning, detailed engineering, installation, procurement, maintenance and decommissioning of oil and gas facilities. In a recent note, Craig Howie, analyst at Blue Oar Securities explored the possibility that the engineering and construction companies could constitute something of an Achilles’ heel for the sector.

He wrote: ‘Although order books provide good visibility, revenues are lumpy as payments are received according to project milestones. Execution risk is high, and margins are exposed to cost overruns and delays, particularly as raw material costs rise and reliance is place on increasingly stretched subcontractors. In addition, growth is constrained by capacity, with available manpower emerging as a real issue.’

He raises some important points, the cost of steel, for example, has gone up significantly in recent months and the challenges he is talking about will have to be considered carefully by the operators in this space such as Wood Group, AMEC, Lamprell and our sector ‘Rising Star’ candidate, Kentz. They are not insurmountable challenges though. Margins may be hit but a lot of the pain can be passed on to clients who have little choice but to invest in their services.

Beyond these major categories of oil service firms there are some more esoteric niche players. Companies such as Velosi, which provides quality assurance, quality control and asset integrity services to the majors or KBC Advanced Technologies which, among other things, offers specialist modelling software to the refining industry. While their fortunes are still linked to the macro environment the link is perhaps less obvious than in the more easily defined companies discussed above. On the whole these companies tend to be far smaller: Velosi has a market cap of just over £48 million and KBC is valued by the market at around £22 million.

For the bigger names the picture is relatively clear. The next few years will continue to see unprecedented investment in the services they provide. Resource nationalism has a double benefit: the prominence of the NOCs, which will continue to need their expertise, has helped squeeze the big integrated groups, which in turn have to invest more in the reserves they can get at. The successful companies will be those that can attract this flood of cash and successfully manage the growth it promotes.

Key indicators

The economics:

• The oil price

• Baker Hughes worldwide rig count

• Rig utilisation rate

• The cost of steel and other raw materials

• Exploration spending of the majors

• Number of graduates from

industry-relevant courses

• Level of world energy demand

• EIA petroleum status report

Sector facts and figures

Number of companies: 19

(Main market): 6

(Aim): 13

Sector PE: 18.15

EPS growth: 26.27

Prospective yield: 1.57

TOP ANALYSTS

Alejandro Demichelis – Merrill Lynch

Huge changes

Looking at the oil services space from a pan-European perspective Alejandro Demichellis has little doubt that the sector is hot at the moment. He says ‘The industry is working flat out with very limited spare capacity especially in certain areas.

‘We are positive on three parts of the market in particular: subsea construction, pipeline manufacturing and the deep-water drilling market. From a regional perspective we consider the main centres of growth to be West Africa, Brazil and deep-water Gulf of Mexico.’

Demichelis has been covering the oil services beat for Merrill Lynch for the past four years and before that worked for five years for energy consultants Wood McKenzie, he says the sector has changed enormously in that time: ‘UK oil service companies have far less exposure to the North Sea than they did, they are real global players and in some areas they are market leaders.’

Asked what makes a good analyst he replies: ‘Being close to the companies to get a picture of exactly where they are going. Understanding the market – I spend a lot of time looking at the capex plans of the majors and even looking at things such as steel prices to understand the wider context these companies

operate in.’

Demichelis adds that he also remains in close contact with his opposite numbers in places such as Latin America and Asia in order to have a global perspective on the main issues facing the sector.

Peter Hitchens – Seymour Pierce

Identifying trends

‘I’m not just a bean counter,’ is a point that Peter Hitchens is keen to emphasise when explaining his role as an analyst. ‘I think one of the problems is that we are perceived as being number-crunchers. My job is to identify trends in the

industry.’

The recent reporting season saw the majority of companies surprise on the upside with their earnings – something that Hitchens believes is, at least in part, due to conservative FDs who have experienced the sector’s more difficult times.

‘In all honesty I don’t believe a single forecast I’ve got at the moment, the important thing to understand is where earnings are going to go up.’

Hitchens, who points to the importance of his specialist sales partner Tanya Clarke, says that he picked up on the upswing in oil services at an early stage in this current cycle having started looking at the sector around four years ago.

‘It used to be something that was lumbered with the junior oil & gas analyst but after the growth of the past few years it is now worth over £10 billion and can’t be as easily dismissed.’

And he maintains that if declining prices were to lead to a downturn it would be a good opportunity to load up on the companies he favours such as Hunting, Wellstream and Lamprell.

‘I’m not a day trader, I’ve done this for 22 years and I’ve seen all sides of the cycle; my job is to identify the companies that will perform in the long term.’

Keith Morris – Evolution Securities

Hands-on

Analysts come from a number of different backgrounds but Keith Morris believes that his hands-on experience in the oil industry gives him a key advantage over some of the others that cover the sector. Morris, who has a PhD in hydrocarbon geology, has nine years’ experience working in both exploration and corporate development for British Gas, Kerr McGee and Lasmo. He says: ‘I think it’s important in terms of having a basic understanding of the industry and who does what. It also helps in terms of having contacts in the industry and getting feedback on companies, their credibility and how they are perceived from an industry perspective.’

Credibility is clearly important but Morris also highlights the importance of finding a ‘good story’ in an attractive niche. That’s certainly an easier job than when Morris first started looking at the sector 15 years ago. ‘If you were looking at the UK the sector hardly existed at all. It has now grown to a completely different scale and there is a lot more scope.

‘These companies still work in a global market, though, and you have to have a global overview – looking at how a company’s US competitors are doing and how the whole capacity situation is working.’

He identifies the Middle East as a key growth region and is positive on both Lamprell and Kentz due to their strong presence there. He also sees technology as a key differentiator and points to Expro, which recently attracted bid interest.

STOCK FOCUS - BEST BUYS

Hallin Marine Subsea International - Treasures of the deep

The company provides subsea solutions to the international oil & gas industry, a particular sweet spot in the sector. The Global Perspectives Subsea Market Update estimates activity in the industry will remain buoyant over the next five years, with forecast subsea capital expenditure of around $106 billion.

The group benefits from exposure to high-growth markets in Asia India, China, Africa, the Middle East. The company recently added an engineering division to build subsea equipment vessels for its own use and to sell to outside parties.

The most recent results underlined the potential, with revenues up 67% to $64.8 million, and in February the company won a record two-year contract worth $40 million for the supply of its diving vessel. The main business involves contracting out its dive support vessels (DSVs), certified saturation diving systems (SATs) and remotely operated vehicles (ROVs) to carry out subsea operations. Typical work includes surveying, maintaining, repairing and installing equipment on the seabed.

Hallin came to the junior market in April 2005 and has climbed more than 100% from a low 45p in January last year to 130p. According to house broker Finn Capital the stock is currently trading on a 2008 prospective PE of 9.2, falling to 8.5 in 2009.

Analyst David Buxton, is in no doubt about the firm’s potential: ‘We believe the shares remain undervalued and offer a good entry point for investors looking for exposure to the ongoing strength of the oil & gas subsea market. We initiate with a strong buy recommendation and 186p

target price.’

Hunting - Energy services strikes it rich

Since posting strong results in February Hunting has performed relatively well, yet it still looks undervalued compared with some of its peers in the UK. A prospective PE of 17.1 does not look demanding when set against a sector average of 18.15 and the market is still to understand fully the potential of the business. The company’s growth is being driven by the Hunting energy services division, an international business that helps to support the drilling of wells.

Gibson Energy is seen as a much lower-margin business. There is some validity to the view. Gibson is based in Alberta, Canada and is principally involved in transporting and marketing oil produced from the Abathasca tar sands. Clearly this activity is seeing unprecedented expansion due to historically high oil prices. The energy services arm should continue to perform in the medium to long term and Gibson’s prospects should improve as the tar sands project gathers steam.

At the most recent results update the company seemed to be more open to the idea of spinning off the two divisions – something for which there has been some clamour, for some time. This could help to crystallise value for investors. At 839p Hunting is edging closer to a price target of 850p issued by Seymour Pierce – which has a buy recommendation on the stock. Analyst Peter Hitchens says: ‘Hunting is our favoured oil service company. The shares are trading at a discount to the rest of the sector on the basis that Hunting’s businesses are seen as low-margin and hence of inferior quality. We maintain this is wrong and that a rerating is justified.’

Lamprell - Looking to deep sea rigs

The UAE-based rig refurbishment specialist beat analysts’ expectations with its numbers for 2007. A net profit of $86.2 million, up 51% compared with $56.9 million in 2006, was largely driven by improving margins, and the company is working to increase capacity. To that end it is constructing a facility that will come on stream early next year.

The new yard at Hamriyah will increase capacity by some 80% and enable the company to secure a presence in the lucrative deep sea rig market. There is particular opportunity for the company offshore India where the state operator ONGC has acknowledged a need to increase investment. It will also increase the company’s deep-water capability.

Buying now is more likely to bring reward next year when the Hamriyah facility is up and running. The firm has also announced its intention to move to the main market before the end of 2008 and in all likelihood it would then become a FTSE 250 company which would certainly be a catalyst for the share price. The security of the business has also looked more certain as some high-profile contracts suggested there was enduring strength in the rig market.

Citigroup recently reiterated its ‘buy’ recommendation on the stock and set a price target of 480p – the stock currently changes hands for 417p. We still see the possibility of further upgrades, particularly in 2009, once the Hamriyah facility comes on stream.’

STOCK FOCUS - STEER CLEAR

Bateman Litwin - Bust-up over Delta-T

If you looked at Netherlands-based Bateman, which principally operates in the engineering and construction sub-sector, purely on a PE basis then you might think it represented an attractive investment opportunity.

An increasing part of its business revolves around providing proprietary technology in the renewable energy, phosphate and solvent extraction industries. It trades on a lowly eight times’ 2008 earnings after receiving a battering for posting less than stellar results for the first six months. However, those results did raise some important questions about the company’s strategy. The main black mark being the ill advised investment in the US refinery plant designer and biofuel technology firm Delta-T. The deal resulted in a lawsuit filed by Bateman Litwin against the founders, who were forced out of Delta-T last Autumn. They countered suggestions that they had misrepresented the financial status of the company, suggesting instead that Bateman was acting out of ‘buyer’s remorse’.

Soveriegn Oilfield - Driller killer

Two main drags on Sovereign’s performance over the past year have seen the share price collapse from a year high of 187.5p to its current level of just above 30p.

One has been the dreadful performance of its drilling division, the other has been the high level of debt on the company’s balance sheet – a particular negative in the current environment. The company had geared itself up in order to make acquisitions but that strategy looks flawed in hindsight The company is now having to renegotiate that debt and as a condition has had to secure shareholder approval for the disposal of the drilling division. It will now focus on the fabrication side of the business.

This may be a step in the right direction and Sovereign did stage a mini rally on the award of some new contracts but the fact that this ground has since been surrendered suggests the company still has convincing to do before it should be seriously considered by investors.

Wood Group - Gas turbine drags down profits

In a sector where, generally speaking, the potential is pretty massive, identifying definite sell candidates is difficult. However, some companies offer better investment cases than others. Undoubtedly this is a strong business with a clear capacity for long-term growth but there are some obstacles to continuing progress that perhaps undermine the company’s current valuation.

The long-term picture remains healthy. The company’s engineering division continues to perform well, as does the well support arm. Gas turbine services has been more problematic and was a drag on recently announced headline profits. Like all companies in the engineering and construction space Wood Group is facing a rapid rise in the cost of raw materials and the use of subcontractors, although this is mitigated somewhat by the company’s strategy of not taking on fixed price contract risk.

A rating of 18.3 times’ 2008 earnings may only be a modest premium to the sector average, but given the structural problems the company faces perhaps it is worth being elsewhere in the sector for now.

Management admitted alongside the results that the market for ethanol in the US would be ‘dead’ for the rest of the year and it cannot see the picture improving until spring next year. Delta-T could be a significant drag on performance and sentiment in the intervening period.

While overall results were still solid the outlook statement lacked the bullish tone adopted by many peers, and the company stressed the impact Delta-T would have on performance in the second half.

Given the challenges facing engineering and construction specialists in the sector, in the form of high raw material costs and reliance on overstretched subcontractors, a focused approach will be crucial. Investors may be concerned that Delta T indicates a lack of focus on the part of Bateman’s management. Joanna Craig, of house broker Oriel Securities, downgraded the stock to hold in the wake of the disappointing interims.

On the other hand Evolution Securities reiterated a buy recommendation and set a 300p price target, saying: ‘In our view there could be a strong turnaround story here, starting at a low multiple.’

While it is possible that the stock will rebound in the short term, in the long term the level of growth on offer does not match that of its peers. If investors become more selective in the wake of a fall in the oil price then the stock could be punished more than some others.

RISING STAR

O’Donnell keeps Kentz in full flow

The oil industry engineer has kept on running since hitting the market, by Tom Sieber

Solid and unflashy are two words that sum up the management team at Kentz; in the flesh they make no attempt to exaggerate or oversell the potential of the business they oversee.

And they probably don’t need to, there is nothing unflashy about the growth rate the company has achieved over the past few years. Revenue of $545 million for 2007 was up more than 47% on the year before and, if this kind of growth can be sustained or bettered in the next couple of years, Kentz could soon be rubbing shoulders with the likes of Expro and Wood Group in the loftier environs of the FTSE 250.

The company, which provides engineering and construction solutions to the industry, only joined the junior market in February. The stock has motored along since, up more than 28% on the issue price. But even taking this strong performance into account the firm’s shares still look somewhat undervalued compared with its peers. House broker Evolution Securities is confident of upside in the current price with a buy recommendation and a price target of 190p – the shares are still 40p away.

Kentz has found the market amenable to its story. CEO Hugh O’Donnell says: ‘We spoke to a number of people in the run-up to the IPO and there is no doubt that they understood the opportunities on offer in oil services. Following the flotation we’ve ended up with a great group of shareholders.’ No doubt a bidding pipeline in excess of $1 billion helps to underscore investor confidence.

Its history dates back to 1919, when it began operating in its native Ireland. From these humble origins it grew to become one of the biggest construction firms in Ireland and moved into the international arena in the 1970s. It has now grown to the extent that it employs more than 8,000 people in around 20 countries.

It has three main divisions – engineering, construction and technical support services – and in each area offers, as O’Donnell puts it, a ‘cradle-to-grave’ project management approach, from design all the way through to completion of construction.

An attribute that helps to mark Kentz out in this area is its excellent safety record. As a note from Evolution Securities explains: ‘Year by year, Kentz has continued to increase their completion of projects without LTI (lost time incidents). In 2006 alone, the company statistics show that 21 million man-hours were completed without a single LTI. Added to this achievement is an LTIFR (lost time incident frequency rate) of 0.03 and 92% of Kentz projects were executed without a LTI. These rates are top quartile by industry standards.’

Safety has become increasingly important for the industry in recent years following a number of high-profile incidents, including the accident at BP’s refinery in Texas City, which left 15 dead.

As O’Donnell observes: ‘It’s all about relationships’ and the trust Kentz’s safety record engenders has undoubtedly helped to sustain repeat business.

Its main areas of operation are the Middle East, Sub-Saharan Africa and the Arctic. In the latter it works in some extremely remote site locations with working temperatures ranging from -40ºc to 40ºc. It assists both Shell and ExxonMobil with two separate multi-billion dollar oil projects on Sakhalin Island in Russia’s forbidding far east.

The importance of the Middle East to Kentz cannot be overstated. Gulf Coast countries plan some $1.1 trillion worth of projects over the next five years, almost a third of which are oil, gas and petrochemical. Already two-thirds of the company’s revenue comes from the Middle East and 80% of the current order book is derived from the region.

‘The barriers to entry are pretty high and, having worked there for 30 years and built it up, that track record and reputation is a clear differentiator for us,’ observes O’Donnell

Kentz is a definite main market candidate, something O’Donnell doesn’t rule out, describing it as a ‘logical step’. It won’t happen overnight – the group has only just gone public – but it should happen eventually. Particularly as the company is looking to supplement its impressive organic growth with some corporate activity. Management says it is looking at two key upstream targets that can service clients chasing reserves in marginal, remote and deep-water fields.

O’Donnell says: ‘This is significant for us. It would allow us to include additional service offerings for our clients and would increase our capacity to take on larger

projects.’

Kentz is also seeking to promote growth by forging alliances and joint ventures to reduce its exposure to the risks of taking on larger projects.

A key challenge for any company targeting significant growth is to manage that growth so as not to lose sight of core competencies, something O’Donnell acknowledges. He adds: ‘We’ll just keep doing what we’re doing, what we do well and only take on the kind of projects we know we can deliver.

Another constraint management identifies is the cost of attracting and retaining good people in a tight labour market.

‘Our top 100 managers have all been with us for 18 years or more so we have a pretty good track record in this area,’ O’Donnell observes.

In fact, across the board, the group can claim a record that should help it secure the contracts necessary to build on the success of the past few years. Clearly then, Kentz is a rising star of the sector.

CHARTIST

Go with the flow

The burning question for oil services is whether it still has the legs to surprise the market, by Simon Griffin

On a trade weighted basis, in the last 12 months the oil services sector has definitely been the place to be, outperforming the FTSE 100 by a whopping 60%. This does disguise a decline of 18% in January, however, from those lows the sector is already up some 29% for 2008. Perhaps this strength is an unsurprising consequence, given the rise in the oil price that has inevitably stuffed the pockets of oil companies full of cash and who as a result have been and will likely continue to go on a spending spree for the products and services that companies in this sector provide. The question has to be whether the market has done its job and already discounted a rosy outlook or whether there is more to go for. Despite a tight credit market, perhaps recent active interest from private equity predators signals that some believe real value remains for the taking.

Looking at the capitalisation weighted chart of the sector, it is evident that it suffered a significant correction as it entered the new year, a move that pressured the 200-day average and moved close to a test of support from congestion seen between May and August of last year. This move has been presaged by bearish momentum divergence since early summer. While we saw lower lows, we clearly did not see a lower high during this phase and as a result a bear trend was not confirmed. Indeed the subsequent bounce to mid-March achieved a higher high and has been exceeded again.

As to the future, the jury remains out, we could have formed a mid-move inverse head and shoulders pattern, in which case the market could be expected to continue upwards by a further 20%. However, the risk is that we are still forming one of the trickiest formations to technically trade, that of an expanding triangle pattern. If the latter is the case then the sector could now be due a correction. In reality it would be prudent to await any move below the mid-March lows (necessitating a 12% drop from current levels) before concluding that the bearish scenario will prevail and with new highs being seen the best strategy is probably to go with the flow.

Lamprell (LAM)

BUY 445p TARGET 525p STOP LOSS 415p

Shareholders in the Gulf-based rig refurber must have been worried by the chart of their shares during the last six months. The growth rate was visibly slowing as volatility developed. There even seemed the possibility that a head and shoulders pattern was forming. Critically, however, the neckline drawn off the lows seen in August and December of last year, was never broken. Chart followers will know that such a pattern is not confirmed until it completes. Instead, the shares moved to develop a symmetrical triangle pattern. Again we could not be sure which way the break would occur, such triangles can go either way. As it happens high volume at the end of March was followed by a rise, suggesting significant buying and the breakout has occurred pretty much as per textbook definition, ie approximately two-thirds toward the pattern’s apex. This move has taken the shares up to test the turn of the year highs at 444p, however, the target from the triangle points to an eventual move to 525p. That would see the old October all-time high of 494p bettered.

Wood Group (WG.)

BUY 454p TARGET 530p STOP LOSS 425p

A not dissimilar picture has developed in the shares of Wood Group, which offers broad exposure to the oil services sector. The shares rose by over 280% since they bottomed at a lowly 113p back in mid-2004. Again the log scale chart is dominated by a broad bull channel, the base line of which terminated the sharp sell off that developed early into 2008, following a sideways ranging phase in the autumn and winter of 2007. Its behaviour is yet another example of why buying on a test of an established channel line can be highly lucrative and also provide for the setting of tight protective stops. The drop can be seen to have been a short lived ‘V’ bottom which itself is also bullish. Subsequently it seems an inverse head and shoulders pattern has formed and with the neckline breaking during last week on raised volume, together with the break of trend line resistance on the momentum indicator, it suggests an eventual target move to 530p. This would likely see a close approach of the channel parallel upper return line, though a post breakout correction to test the neckline for support could occur first. Any move below the neckline would likely negate this bullish scenario.