$LAM.L – Lamprell disappoints on pre-close trading statement

LAM (Lamprell) make oil rigs. It released a trading update today, send the shares down 13.6% to 97.2p, as at the time of writing. The RNS notes (emphasis mine):

The Group is expected to report financial performance for 2014 slightly ahead of expectations following a strong finish to the year. This was an exceptionally strong year for Lamprell and this level of performance will not be replicated in 2015 due to our projects being at different stages in their construction cycles and the weaker market environment. The Group’s focus will be on maintaining a competitive position in the current market conditions which are expected to be challenging throughout 2015. The effects of the announced reductions in capital expenditure from many operators are already having an impact on global markets and are expected to affect Lamprell’s bid pipeline.

So, the big question is: is it a buy? According to Stockopedia, it has a value rank of 96, quality 86, momentum 61, and an overall stock rank of 97. It trades on a PE of 8.96, and an EV/EBITDA of 2.58. Although the momentum score is 61, its RS6m (6-month relative strength) is -25%. It qualifies for Greenblatt’s Magic Formula, Walter Schloss’s ‘New Lows’, and (positive) Earnings Surprise Momentum Screen. So some information is saying that LAM has good momentum, and some saying that it has bad momentum. I come down on the side of “bad”, due the poor RS6m.

Despite the low PER and EV/EBITDA, which may attract some value investors, I am not tempted. The low oil prices made it likely that capital expenditure would be reduced. The thing is, even if oil does recover in short order, I’m not convinced that oil producers will suddenly up their capital expenditure. Capital expenditure is easy to cut, but I think the producers will think long and hard before committing resources. Oil rig manufacture is also possibly the worst line to be in, due to the relative cost of production.

My expectation is, therefore, that a buy at these levels means you’ll be in this for the long haul.

I had actually bailed out of LAM in March 2014 at 134p. I judged the technical indiactors to be bearish, but what I really didn’t like was the way that the market reacted to the results. I was immediately made to look foolish, as the shares then proceeded to rise to around 175p. There was drop, then a recovery to around 175p in September. It was downhill pretty much all the way since then, as the gravity of lower oil prices seemed to weigh down the share price.

An interesting article was posted by Wood Mackenzie (http://is.gd/dtyHRi), courtsey of TheValuePerspective (https://twitter.com/Thevalueteam). The gist is this: at $50 a barrel, only 0.2% of the global supply is cash negative. The UK and US will suffer the most. At $40, 1.6% of supply will become cash negative.

Looking at futures, the markets expect oil prices to be higher in a year’s time than they are now. Oil prices have crashed, and they could easily surge again. It’s not a done deal, though. As you can see from the preceeding paragraph, oil prices could me maintained at this level without affecting supply that much. The high-cost producers (my fellow Aberdonians, unfortunately) will get crushed.

You could argue that LAM is an option on recovery, given its low EV/EBITDA. Their operating margins look like they’re at the low end, too, so I could see how that idea might work. To clarify, though: I have no position in LAM.

In the end, I don’t think anybody really knows.


About mcturra2000

Computer programmer living in Scotland.
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