John Wood Group PLC (WG) Finds More Synergies In Merger With Amec Foster Wheeler PLC (AMFW)

Aberdeen-based oilfield services company John Wood Group PLC (LON:WG) has strengthened its case for the proposed-merger with London-headquartered peer Amec Foster Wheeler PLC (LON:AMFW), announcing that it expects synergies of at least £150 million annually, compared to £110 million forecasted earlier.

WG expects to fully realize these cost-savings by the end of third-year following the merger—through economies of scale and cutting duplicate costs in operations, corporate and administration. Cost of implementing these changes remained unchanged from an earlier estimate at £190 million over a three-year period.

Rationale behind the merger

“By leveraging Amec Foster Wheeler’s and Wood Group’s combined asset life cycle services across project delivery, engineering, modifications, construction, operations, maintenance and consulting activities, the Combined Group will be able to better capitalise on growth opportunities across a broad cross section of energy and industrial end markets”, said WG Chairman Ian Merchant, recommending shareholders to vote for an all-share offer, announced Mar. 13, that would result in AMFW shareholders owning a 44% stake in the combined company.

A historical weakness in oil prices and industry’s expectations for the prices to remain near US$50-mark in the medium term has triggered a consolidation in the oil industry, where margins have been crushed, and also in the oilfield services industry, which is facing budget-constraints of their clients struggling to revive profitability.

LSE:AMFW Amec Foster Wheeler Past and Future Earnings by Simply Wall St
LSE:AMFW Amec Foster Wheeler Past and Future Earnings by Simply Wall St

Not only did WG saw a substantial decline in revenue, it hardly managed to remain profitable. On the other hand, Amec Foster Wheeler was hit even harder as it recorded a £733 million loss over the past reported year (as of 30 June 2016), compared to £84 million in profits in the previous corresponding period.

This period also saw a change in the leadership with Jon Lewis taking the reins of the company in June 2016. Mr Lewis launched cost reduction efforts, to the tune of £100 million, and sale of nearly half-a-billion worth of non-core assets, which is expected to bring AMFW back to profitability.

“However, the Amec Foster Wheeler Board believes that a combination with Wood Group adds to the standalone prospects of Amec Foster Wheeler, by accelerating the delivery of the future value inherent in the Amec Foster Wheeler business and, at the same time, helps to realise the full potential of each of Amec Foster Wheeler and Wood Group” said AMFW chairman John Connolly. The boards of both the companies have unanimously recommended shareholders to go ahead with the merger.

BHP Billiton (LON:BLT) declares force majeure

In the aftermath of Cyclone Debbie, stronger than expected floodwaters have delayed the rail-repair work, forcing BHP to declare force majeure — invoked to indicate an inability to fulfill contracts due to unexpected circumstances such as natural calamities. This declaration covers all of BHP’s Queensland coking coal operations, located in Bowen Basin, that account for nearly 80% of the revenue generated by its coal operations across the globe. Coking/metallurgical coal is a key raw material in steel-manufacturing

“BHP Billiton confirms that force majeure has been declared for all BMA Coal and all BMC Coal products as a result of damage caused by Cyclone Debbie to the network infrastructure of rail track provider Aurizon”, said BHP in a statement this Wednesday.

Meanwhile, coking coal prices staged a rally as disruption In Australia, the largest supplier of seaborne coking coal to the steel manufacturers in China, has triggered fears of a shortage in supply. China, being the largest importer of the commodity, drives the market dynamics, and also prices, which have skyrocketed in the wake of disruption caused by Cyclone Debbie.

LSE:BLT BHP Billiton Past and Future Earnings by Simply Wall St
LSE:BLT BHP Billiton Past and Future Earnings by Simply Wall St

Strong demand in bulk commodities, metallurgical coal and iron ore, driven by Chinese fiscal stimulus has been a major profit driver for mining giants BHP and Rio Tinto, following the prices hit multi-year lows in early-2016. The shortage caused due to the disruption can end up benefitting the mining giants, despite lower volumes, if coking coal prices remain strong amid fears of shortage in supply.