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Bleak times ahead for mining services?

This week investors got the opportunity to hear from drilling supplier Imdex (ASX: IMD) when it held its Annual General Meeting (AGM) on Thursday. The company provides a number of critical products and services that are used on drilling rigs, and as such Imdex has a unique position and insight into the mining, mineral exploration, oil and gas and water well drilling industries.

The AGM provided an update of Imdex’s first-quarter trading results and also provided investors with an outlook for the financial year ending June 2014. Overall, given Imdex’s large exposure to the minerals industry, management’s outlook doesn’t leave shareholders with much to get excited about. The one ‘bright spot’, and the area that management is concentrating on trying to exploit, is the exciting outlook for the oil and gas sector. Indeed, the outlooks for these sectors are polar opposites and provide important insights for investors.

For the first quarter, Imdex reported a groupwide fall in revenue of 28% and an 84% fall in earnings before interest, tax and amortisation on the previous corresponding period. At a divisional level, revenues declined 39% within minerals but gained 10% in oil and gas.

In terms of guidance for the full year, Managing Director Mr Bernie Ridgeway suggested there would be continued subdued activity in the minerals industry with the industry in cyclical slowdown, and robust activity in the oil and gas sector.

Given Mr Ridgeway’s comments it’s interesting to note the support that some companies within the sector appear to be enjoying; for example drilling rig contractor Ausdrill’s (ASX: ASL) shares are up 75% from their lows in July. Indeed many mining service companies that are highly leveraged to the minerals industry have enjoyed strong recent share price gains despite what appear to be bleak times ahead.

The comments bode well for mining service firms that are active within the oil and gas sector. As I highlighted in this article, firms including Monadelphous Group (ASX: MND) and UGL (ASX: UGL) appear well placed to win contracts in this burgeoning sector.

Foolish takeaway

The structural challenges facing much of the resource sector and mining services sector makes them a danger ground for value traps, and investors need to tread particularly carefully through these sectors.

Unsustainably high-yields can be a trap and there are plenty of them in the mining service sector at present. Avoid these traps and discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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