Can we flick the switch to an energy boom?

It is not all misery for resource-service companies as the energy sector primes to pick up where mining left off.

Major miners BHP Billiton and Rio Tinto have gained convincing momentum since June as the iron-ore price has rebounded and held steady. The same can’t be said for mining service contractors.

 It has been well documented mining capital expenditure is on the decline and The Reserve Bank of Australia has echoed this sentiment. Monetary policymakers, along with the market in general, have become so preoccupied with the expected decline of mining investment other industries requiring service contractors have been somewhat overlooked. Contrary to what may be the mainstream perception, forecasts by BIS Shrapnel estimate capital expenditure across the oil and gas market and maintenance in general will more than offset the lower spend across mining. 

Evidently it is not all misery for mining-service companies who can cater to both resource and energy markets. Service contractors with less dependence on the resource industry are going to be able to reap the fortunes if the BIS Shrapnel expectations concerning capital expenditures eventuate.

The 2013 financial year was decisively difficult for mining-service contractors as market capitalisation slipped some 26 per cent, according to a Price Waterhouse Coopers comparative analysis of 30 ASX mining service companies. Share prices slipped as expectation was rife capital expenditure from miners were on the slide, among other factors. The death of mining and related industries is far from becoming part of history just yet. Only time will tell if the market has in fact over exaggerated the undesirable for the sector.

Monadelphous Group had its annual general meeting today and updated the market this financial year to-date around $500 million of new contracts have been awarded and the expectation is for revenues to moderate for the full year, depending on new contract awards and timing. Last financial year, total contract work including new and extensions came in at $1.3 billion, an increase on the prior year.

While it is a long term view, energy-focused companies inevitably must deal with the increase in capital expenditure over the coming decade as global demand for energy heats up. Cue service companies with the expertise to assist in delivering new projects along with any maintenance requirements.

For now, miners and service contractors alike are focused on the bottom line, increasing competition when it comes to bidding for contracts ultimately placing margins under pressure as companies engage in pricing wars. Despite this, if the value of work is delivered from the energy market the outlook for service contractors isn’t as bleak as we might be led to believe.  

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles