The Australian Workforce and Productivity Agency (AWPA) yesterday released its 2013 resources skills study. It revealed that the resources industry construction workforce is set to collapse over the next four years, shedding more than 78,000 jobs (a 91% decrease). The mining services jobs involved in construction will suffer accordingly.
The mining services sector is characterised by four distinct segments based on the normal life cycle of a mining project. They are feasibility, construction, production and maintenance. The stocks operating in the soon to be decimated construction segment are Ausenco (ASX: AAX), Forge Group (ASX: FGE) and Monadelphous Group (ASX: MND). A glance at the revenue breakdown of Monadelphous, reveals that 68% of total revenue is derived from engineering construction, while Forge is 48.3%.
The job losses in the construction segment will only partially be offset by a rise of nearly 40,000 jobs in the production and maintenance segments. Ideally one would focus on stocks in these segments with limited dependence on a single commodity and a low dependence on favorable outsourcing decisions by mining companies. Companies should also be in a sound financial position, have strong free cash flow and an above market earnings per share growth outlook. Thus, preferred stocks would be Bradken (ASX: BKN), Walter Diversified Services (ASX: WDS) and Orica (ASX: ORI).
Having stated in the prior paragraph that one should avoid mining services companies with a dependence on a single commodity, the AWPA study identified the oil and gas sector as contributing 56% of the 40,000 jobs in the production and maintenance segments. As a result the industry is facing another skills shortage for scarce operators in the oil and gas sector. According to Morningstar, WorleyParsons (ASX: WOR) has developed a high level of expertise in unconventional oil and gas and is well positioned to benefit from the expected strong growth in activity in this sector. With a strong balance sheet, it is well placed to make further accretive acquisitions to help supplement organic growth.
Such is the global competition for skilled workers in the oil and gas sector, the AWPA chairman, Phillip Bullock has called upon industry, government, education and training providers to work together to counter the long lead time required to develop critical skills.
Finally, Morningstar have expressed a preference for larger cap companies with economic moats such as Monadelphous, Orica and WorleyParsons. If we take out Monadelphous on the above findings, it would seem to provide extra confidence for both Orica and WorleyParsons.
Foolish takeaway
Despite the alarming AWPA study, there remain opportunities in the mining services sector. In my opinion, an investor should have more than one reason to invest in a stock. On that basis WorleyParsons is my preferred exposure, as it not only has an economic moat, but also is set to benefit from exposure to the oil and gas sector.
