Why I think investors should avoid this oil stock like the plague

The Motley Fool
oil rig in the sun
oil rig in the sun

Lamprell(LSE: LAM) found itself trekking heavily to the downside on Friday after releasing a shocking trading statement.

The oilfield services mammoth was last dealing 11% lower on the day, although bouncing off intra-day highs -- it had fallen below the 80p per share barrier for the first time since last November earlier in the session.

Lamprell announced revenues of $159.2m between January and June, a shocking 65% decline from the corresponding 2016 period when turnover rang in at $451.3m.

And the Dubai-based business took the hatchet to its full-year sales guidance too. It now anticipates turnover of £370m to £390m "due primarily to the continuing low levels of walk-in work reflecting market conditions." This is a meaty reduction from the firm's prior forecast of $400m to $500m.

If this wasn't disappointing enough, Lamprell suggested that things are not about to improve any time soon. It added that the outlook for 2018 "remains challenging with revenue currently expected to be around 10% lower than 2017 levels, contingent on the timing of potential contract awards."

Chief executive Christopher McDonald said: "Top-line performance will remain subdued as a result of the slow pace of the new major contract awards that we have seen over the past 24 months." He added: "We do not expect to see the potential improvement in market conditions impacting our business in 2018 due to the lag between improved market conditions and project awards in our business streams."

McDonald said that while levels of bidding activity have increased, Lamprell does not expect to see turnover grow until 2019.

Losses predicted

On the plus side, Lamprell advised that it had flipped back into the black during the first six months of 2017. It recorded net profit of $1.1m versus the $4.4m loss printed 12 months earlier, reflecting the efforts it has made to strip costs out of the system.

Still, the City was not expecting these measures to prevent Lamprell reporting losses for this year and next, with losses of 2.8 US cents and 0.1 cents per share forecast for 2017 and 2018 respectively. And these figures are likely to be downgraded on the back of today's release.

Given that the enduring market imbalance is likely to keep crude prices on the defensive, and with it the exploration budgets of oil explorers across the globe, I believe Lamprell's top line could remain under pressure for a long time to come.

Another one to avoid

I also reckon share pickers should give metals and energy giant Vedanta Resources (LSE: VED) a wide berth right now.

Like Lamprell, Vedanta is also at the mercy of the worrying supply and demand outlook washing over the crude sector, but this is not the only worry as supply concerns in its other key markets of zinc, iron ore and copper also hang heavy.

The City expects earnings at the FTSE 250 business to surge from 1.1 US cents per share to 87.5 cents in the year to March 2018, on the back of surging metal values, and again to 164.2 cents in fiscal 2019.

I believe these estimates of sustained profits growth could be subject to severe downgrades in the months ahead, however. So despite its forward P/E ratio of 12.6 times, I reckon Vedanta is still too risky right now.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.