Broker snap: Morgan Stanley upgrades Wood Group to 'overweight'

30th May 2013 10:15

Shares in Wood Group were performing well on Thursday morning after Morgan Stanley upgraded its rating on the stock from 'equal weight' to 'overweight' despite taking a more cautious view on the wider oil services sector.The broker lowered its sector view on the whole to 'in-line', saying that it expects industry capital expenditure (capex) growth to slip to 5.0% in the near term, compared with the 18% compound annual growth rate (CAGR) seen since 2003."We reconsider the outlook for oil & gas capex growth, given our view of the new oil price environment, and following recent project delays & events in the mining sector. "With oil prices the key determinant of industry operating cash flow, and given our expectation for an increasingly range bound price environment, we expect industry operating cash flow growth to fall from 14% CAGR (since 2003) to around 3.0% in the future."Nevertheless, Wood Group is now included in Morgan Stanley's top picks in the European oil services category, as it thinks the company is the best positioned to cope with a lower growth outlook for spending."We see Wood Group as well positioned, given its asset light engineering business model, which we expect to continue delivering above cost of capital returns in the mid-teens out to 2015."However, the broker downgraded its target prices across the sector, saying that the lower outlook for growth requires a lower price-to-earnings multiple. As such, Wood Group's target price has been reduced from 1,065p to 1,040p.The stock was up 2.76% at 856.5p by 10:25 on Thursday.