More on Abbot
Abbot
Oil engineering services company Abbot Group’s reported an increase in earnings for the year to December 2004. Operating profits on continuing businesses (before goodwill and amortisations) rose to £29.2m from £23.9m last year. Group pre tax profits were flat at £21.9m (2003: £20.6m). Abbot achieved strong growth in its international operations although there is continuing decline in North Sea activity.
Abbot has a large exposure to North Sea activity but business has declined, in spite of high oil prices, which Abbot blames on the regulatory and fiscal regime (which create disincentives to further investment). Abbot reports that some of its major North Sea clients have indicated that existing contracts will be extended for periods of up to three years, although the level of activity is likely to be lower. Abbot is pessimistic on prospects in 2005 for its entire North Sea portfolio of some 20 platforms.
Naturally, Abbot is now increasingly focusing on expansion overseas. The company has won a number of contracts in the Middle East, Western Siberia, Nigeria and also in Libya and has increased its land rig fleet to 45 operational units. A further five units are currently under construction.
Growth will be driven by investment. Abbot is either constructing, upgrading or negotiating to buy a total of twelve rigs, which together with the recent acquisition of IADC(which owns and operates ten workover and drilling rigs in Libya, the majority of which are under contract to both Libyan and western operators) will result in an investment of over $200m during 2004/5. (Workover rigs are maintenance units that provide cleaning, reinstatement stimulation services to wells to increase flow)
Some of this investment will contribute to results in 2005 the but the full contribution will occur from 2006 onwards. Major offshore projects in Azerbaijan, Angola and Sakhalin Island are expected to drive medium term growth. The Azerbaijan project will commence operation in 2005 and the others will contribute to results in 2006, 2007 and 2008.
The outlook for the oil industry still seems good. The main concerns with this stock are the decline in the UK offshore activities and the strength of the sterling which will dampen 2004 results. (Abbot’s full year results for 2004 are not anywhere as impressive as those of the oil majors and the consensus forecasts for 2005 indicate no growth.)
Trading at 215.75p, the prospective PE of 20.5× is at the upper end of the sector range, which looks rather expensive although the medium term prospects do look reasonable. The yield is 2.4%.
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