AMEC Foster Wheeler heading lower

Amec Foster Wheeler will reveal its first-half results on 27 August, and the pressure in the oil market is being felt by the company.

City of London skyline
Source: Bloomberg

The engineering company that specialises in the oil and gas sector is being hit hard by the collapse in the price of oil. The firm revealed its first set of results after the merger in March 2015; the company stated that revenue ticked higher by 2% and pre-tax profits fell by 39%, but that was largely down to the merger costs.

The London-headquartered firm is heavily dependent on big oil and gas companies for revenue, and the severe drop in the price of oil has prompted oil companies to cut their capital expenditure budgets, subsequently hurting Amec Foster Wheeler. 

Amec spent a lot of time and money in its pursuit of Foster Wheeler, and the company hopes to see cost saving synergies of £125 million from the deal. However, I feel the deal was much more attractive when the price was closer to $100 per barrel, and now the outlook for the underlying market is very different.

As titans of the oil and gas industry tighten their belts, Amec Foster wheeler will have to follow suit. In 2104, the clean energy division helped offset weakness in other operations of the business, and this year will a similar situation.

When the company reports its results, the market is anticipating revenue of £2.6 billion and adjusted net income of £90 million, compared with the last year’s second-half revenue and adjusted net income of £2.1 billion and £127 million. The firm will announce its full-year results in March 2016, and traders are expecting revenue of £5.6 billion and adjusted net income of £268 million. These estimates represent a 43% jump in revenue and a 10% increase in adjusted net income.

Equity analysts are bullish on Amec Foster Wheeler, and out of the 16 recommendations, 11 are buys, three are holds, and two are sells. The average target price is £9.99, which is 38% above the current price. Investment banks are less bullish on John Wood Group, with seven buys, five holds, and four are sells from 16 ratings. The average target price is £6.50, 15% above the current price.

The share price of Amec Foster Wheeler has been in decline since June 2014 and the downside momentum is set to continue, with support at £6 as the target. Should we see a snap back in the price, the previous support at £7.80 will now act as resistance.

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