Three tried and tested market principles were reinforced by the latest update from beleaguered energy services firm Wood Group (WG.).

I have followed this business for nearly two decades and it’s hard to remember a time when it was in a worse state than it is today.

That’s backed up by the share price which traded at all-time lows below 50p in response to the company’s devastating missive on 7 November, down around 60% in the wake of the third-quarter trading statement.

An independent review was announced to decide if any prior-year adjustments are required on contracts in its Projects business. This follows some already hefty write-offs and creates a layer of uncertainty – something markets always hate. That’s principle one ticked off.

Crucially, any references to the previously promised ‘significant’ free cash flow in 2025 were notable by their absence. This was far more important to the market than the retention of underlying EBITDA (earnings before interest, depreciation and amortisation) guidance for 2024.

Earnings metrics can be inflated by clever accounting – it is the hard currency of cash on which companies are rightly judged. If revenue and earnings are not translating into cash flow then it is only fair to surmise all is not well. Principle number two.

The final principle is illustrated by the biggest reason Wood finds itself in this mess. So-called ‘transformational’ acquisitions are more likely to destroy value than create it. The company has been in restructuring mode and has been dealing with legacy issues ever since its 2017 takover of Amec Foster Wheeler as problem contracts put pressure on its balance sheet. This necessitated the 2022 sale of the company’s built environment consulting business to reduce borrowings.

The business certainly got bigger, it now employs some 35,000 people across 60 countries, but bigger is not necessarily better and warning signs were there from the start. An initial step change in profit and revenue reversed very rapidly and made the company’s words excitedly selling the deal ring very hollow.

US private equity group Apollo pulling out of a lengthy pursuit of the company in May 2023 having done significant due diligence on the business and Dubai’s Sidara also walking away from a deal in August 2024 told their own story.

The market will casting a beady eye over full-year results due in March and a likely year-end trading update in January for signs of updated cash flow guidance. Chief executive Ken Gilmartin and his management team have very little margin for error.

This week’s issue takes a look at the retail sector ahead of the key Christmas trading period and after a difficult period in the run-up to and in the wake of the Budget. But, as James Crux reminds us, amid the gloom there are still some excellent businesses in this industry which are able to deal with the slings and arrows of uneven consumer demand and increased costs. 

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