Why has Amec Foster Wheeler plc dropped 20% today?

Hunting well
Hunting well

Oilfield services firm Amec Foster Wheeler(LSE: AMFW) is the biggest faller in the FTSE 250 today after it announced an update on trading and on the progress of management's review of the business.

///>

It said it's "on course to deliver resilient trading results for this year and next despite the continuing weakness in some of our key markets," but the company's shares have fallen by as much as 20%. What's behind the fall? And should investors avoid the stock, or is this a buying opportunity for the long term?

It's complicated

News that management needs more time to complete its strategic review seems to have unnerved investors. The company had planned a capital markets day for 15 November, but has cancelled this and rescheduled it for as far off as 21 March.

Management is promising to take "an additional £100m permanently out of our annual cost base," and has "identified multiple long-term opportunities to offset the current headwinds" in the oil and gas industry. However, with the company having identified "a number of challenges" as well as opportunities, and these opportunities requiring "more work ... to develop detailed plans on how to deliver their full potential," the market is naturally concerned by the lack of visibility on the future shape of the business.

Similarly, while it expects to sell three assets for £100m before year-end and continues to target £500m of disposals by June 2017, management said: "We have not yet concluded our thinking on the right mix of investment and funding options which in aggregate will lead to an appropriate balance sheet and create a strong ongoing business."

Based on a share price of 475p, Amec is trading on a forward P/E of 9.2 with a prospective dividend yield of 4.4%. However, with the task of sorting out the company clearly much more complex than chief executive Jon Lewis initially expected when he joined in April, I think this is a stock to watch for the time being.

Get set for recovery

Shares of Amec's sector peer Hunting(LSE: HTG) also headed south today, falling by more than 5% to 480p at one point this morning.

Hunting issued a trading update and announced an equity placing, equivalent to almost 10% of the company's current issued share capital. This has been completed, raising £70.9m at 485p a share.

Management said the revenue declines seen in previous quarters have stabilised in Q3, and that while the overall market is likely to remain subdued in the short term (particularly in offshore deepwater drilling), it's seeing an increased level of enquiries and orders in some of its businesses. It believes these businesses "have reached the bottom ... and are now preparing for a return to growth."

The company says the placing will further strengthen its balance sheet and provide additional funds for working capital and investment to "capitalise on the localised areas of market recovery."

Hunting is well run with highly experienced management. It did the right things as the oil price declined and I reckon it's doing the right things now in preparing for the oil and gas industry to return to growth. The company can't be valued on current (negative) earnings and isn't paying a dividend. But I believe the shares are worth buying for a long-term recovery.

The magic million

Investing in well-managed, high-quality businesses when their shares are depressed by external factors is one of the keys to enhancing your returns from the stock market. And you can discover further simple steps towards boosting your wealth in the Motley Fool's FREE guide 10 Steps To Making A Million In The Market.

The Motley Fool's experts show how the magic million is within the reach of many ordinary investors in this straightforward step-by-step guide. There are no strings attached so click here for your free copy.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Advertisement