WOR downgrade causes jitters for the sector

The surprise downgrade to FY14 net profit from WorleyParsons yesterday has changed the outlook for the overall mining services sector.

The 20% downgrade to fiscal year 14 net profit to $260-$300 million is in response to the Australian and Canadian professional services division seeing a very sluggish start to the year as the energy space of the business sees a marked decline. These are key markets for a company such as WOR and for this space to be the cause for concern suggests structural pain may be installed.

The 25% drop in the share price to $16.04 saw a contagion effect to other mining service companies, particularly those with exposure to energy.

Of particular note is the outlook for the likes of Monadelphous, Borat Longyear, Ausdrill and even Cardno; all of which will now come under increased scrutiny over where the businesses are at and whether current forecasts are credible.

The one I would be most concerned over is BLY, which at the last update saw rig utilisation at a dismal 52%. It has registered two consecutive fiscal years of net losses and is looking to increase debt ratios to service current programs. Any changes to its work pipeline and BLY will fall further.

With exploration in the mining and energy space being wound back, as big names such as BHP, RIO and WPL reign in discretionary spending and conduct smaller scale projects internally, this update could signal a structural change to the mining service space. It is for this reason that I am very mindful that the sector, even with the correction seen in April, could be in for a rough time come first-half earnings season.

A once darling sector of the local market, the mining services sector looks to be changing in ways I never thought were possible.

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