A profit warning (10 Jul) from Dutch energy services provider Fugro (FUR:AMS) and lower than expected second quarter earnings (11 Jul) from Norwegian drilling contractor Fred Olsen (FOEO:STO) imply a weak outlook for the global offshore oil and gas industry. This adds to our caution on United Arab Emirates-based rig refurbishment and construction specialist Lamprell (LAM).

Medium-term weakness in its markets will likely derail ongoing self-help measures and a lack of visibility is not reflected in the current rating of 13.2 times 2015 consensus earnings per share of 11.7p. It is important to note the company specialises in jack-up rigs (which have legs which sit on the ocean floor with the drilling equipment ‘jacked up’ above the water’s surface) and demand in its core Middle Eastern market looks fairly robust for now.

LAM - Comparison Line Chart (Rebased to first)

By contrast Fred Olsen owns a fleet of floating deepwater rigs and the company’s management is warning of continuing softness in its market. The FT reports the average day rates charged for these rigs has fallen 25% so far this year, to $350,000. It also notes rig owners cannot find enough work for their equipment. So far this year only 30 rigs have managed to get contracts against 107 in all of last year and 167 in 2012.

While the jack-up market may not face the same over-capacity right now, a significant number of new-build units are expected to hit the market in 2015. Broker Liberum Capital comments: ‘We expect jack-up drilling activity will remain at high levels, particularly in the Middle East, and the market should be able to absorb the newbuilds without significantly denting day rates. It is not clear, however, that a significant number of extra newbuilds are required.’ Newbuild jack-ups accounted for 53% of Lamprell’s revenues in 2013.

Agenda Laprell chart

Two years ago the £526 million cap warned on profits five times as it ran into serious operational difficulties on a number of fixed-price contracts. It eventually posted a 2012 loss of $111 million. Since taking up the reins in the wake of the débâcle industry veteran James Moffatt has steadied the ship, repairing the balance sheet with a $120 million rights issue in May this year, while the group reported that a strong first half would see 2014 numbers ahead of expectations.

However it also warned the year would be heavily first-half weighted and we think it will be difficult to replicate the success seen in the first six months of the year.

Issue Date: 21 Jul 2014