When you’re in the business of making oil rigs, the renewables industry might seem the answer to your problems. The oil slump that began in 2014 knocked prices from their lofty $100-a-barrel perch for a long time to come. That led to capital expenditure budgets being slashed across the board, with hundreds of billions of dollars worth of projects indefinitely delayed.
That has proven acutely painful for Lamprell and its peers. Its shares have slumped from 178p to 68p. Part of its masterplan was to diversify its business, putting its yard in Abu Dhabi to use by making kit for wind farms while it waited for the oil market to pick up.
In a profit warning yesterday, Lamprell said the “learning curve had proven to be steeper than anticipated” on its wind farm project. It expects to make a loss on the contract, which means it expects operating profit to be “materially below market expectations”. It turns out that renewables aren’t as easy as they look.
Yet the share price reaction was muted, and for good reason, too. We can put the admirably forthright tone of the profit warning down to the fact that there is a new management regime who can own up to the errors of the past without it impugning their competence.
The missteps are teething problems that are unlikely to be repeated. And with a buffer of more than $300 million it can afford the odd stumble on the way to the sunlit uplands. Renewables will help Lamprell get to that higher ground by tiding it over the lean years. The project, which related to the big East Anglia One project, was always considered “strategic” by Lamprell — a euphemism for vanishingly low margins. Once it reaches the higher ground, renewables will not be a big part of Lamprell’s appeal.
Instead, its prospects are pinned to Saudi Arabia. Earlier this year it said that it had signed a “transformative” deal under which it would become a 20 per cent shareholder in a $5.2 billion shipyard. The King Salman Maritime Yard is part of the Saudi government’s long-term plan to localise industry to reduce its reliance on oil extraction. The first phase of the huge yard’s construction is expected to be completed by 2020.
It is also hopeful of obtaining a lucrative long-term agreement with Saudi Aramco, the state oil company. That would give it a springboard into a Saudi engineering and construction market worth up to $4 billion a year, according to analysts at Numis.
So Lamprell marks a decent prospect for any investor looking to catch the tailwinds from the eventual recovery in oil company capital expenditure. The dearth of new projects around the world over the past few years means that at some point finance chiefs will have to start approving investments that have languished on the drawing board.
Lamprell’s balance sheet ought to allow it to tough it out. Yet risks remain. Opec’s decision to extend production cuts yesterday should support prices and encourage chief executives worried about giving the go-ahead to a big development. But when and on what scale will the capital expenditure return?
Second, the political situation in Saudi Arabia and the wider region is not easy to read. A reformist crown prince is shaking up the domestic agenda, while the kerfuffle with Qatar and the war in Yemen are a reminder of the volatility of Lamprell’s neighbourhood.
There seems to be little reason to get on board immediately. Lamprell deserves a place on the watch list, but those sunlit uplands remain some distance off.
ADVICE Hold
WHY A bungled renewables project does not touch on the appeal of Lamprell shares, but there is no imminent need to get on board
Aviva
Gone are the oaks, apple trees and acorns. Mark Wilson, Aviva’s chief executive, has largely done away with his narrative of a garden still in need of a good pruning. Now the sun is shining.
So much so, that the leading British insurance group, with about 33 million customers in 16 countries, is planning to hand back cash to shareholders and increase its dividend payout as a percentage of its earnings per share.
The cash has been generated in part by the sale of parts of its international operations — the list includes its joint ventures in France and Spain and its Friends Provident International business — as well as special dividends it has received from UK life operations from its takeover of Friends Life in 2014.
Aviva intends to distribute about £3 billion in 2018 and 2019. About £900 million will go to repay expensive debt, with the rest on stock buybacks and bolt-on acquisitions.
The exciting news for shareholders is slightly tempered by the fact that Aviva is not saying exactly when or how much it will hand back to them. There may also be some qualms about the other part of the plan, to make “bolt-on” acquisitions. The insurer has done some deals to fill in missing areas but it also has a record of thinking big. The Friends purchase was worth a meaty £5.6 billion and, when announced, caused Aviva’s shares to slump.
In reality, Friends has worked out well for Aviva, beefing up its British business. Some of the bolt-on acquisitions could come in this area. Aviva is interested in some of the pension annuity books that are on the block, with the Pru’s in an active sales process. Aviva could buy a slice of £2 billion or so just to replenish its own annuities as they roll off. It could buy more if it wanted to increase its exposure to the world of closed-book annuity businesses, which carry considerable capital benefits.
The company also clearly has overseas ambitions. It has sold quite a bit but sees markets such as Poland, where it hosted a well-received investor day yesterday, as attractive, sending its shares up 2p to 511p. Bolt-on deals in such places would be relatively easy to find.
ADVICE Buy
WHY After restructuring, has moved into growth mode
