Monadelphous Group Limited: The worst is yet to come

Mining services company Monadelphous Group Limited (ASX: MND) has seen its share price fall more than 42% since January this year, but that may be nothing compared to what might be coming.

Economic forecaster BIS Shrapnel has today released a report forecasting the biggest fall in mining investment in history is yet to come. Capital expenditure is expected to fall by 40% over the next four years.
Spokesman Adrian Hart says, “If anything we see investment continuing to fall right through to about 2017 before stabilising. Already we’re seeing a substantial slump take place in iron ore and coal investment around the country but now with the LNG investment boom about to end we’re about to see the biggest slump ever in mining investment.

He added that the current slump has barely begun.

Monadelphous has made much of its move into oil and gas, and away from minerals contracting. But Santos Limited’s (ASX: STO) Gladstone LNG project is due for completion next year, as is Origin Energy Ltd’s (ASX: ORG) Australia Pacific LNG – both in Queensland.

Inpex’s US$34 billion Ichthys LNG Project is reported to be 50% complete and scheduled for first production in 2016. Chevron’s huge Gorgon LNG project is 87% complete, with first gas planned for mid-2015, while Wheatstone LNG is 49% complete.

In other words, most major Australian 1LNG projects are due for completion within the next few years. While other major oil, gas and LNG projects are in the pipeline, contract construction work in the sector is highly likely to dry up, placing huge pressure on mining services companies like Monadelphous.

News out today that BHP Billiton Limited (ASX: BHP) will also cut its capital expenditure to US$13 billion in the 2016 financial year, and is looking for significant cost savings from its Australian coal and iron ore operations. It’s not the only resources company either.

Late last week the company announced that first half sales revenue for the 2015 financial year was likely to be between 15% and 20% lower than the previous period. That will result in a larger relative fall in net profit and earnings per share, suggesting current analyst forecasts are highly optimistic, or have yet to be revised down.

Either way, Monadelphous appears headed for a tough few years.

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Motley Fool writer/analyst Mike King owns shares in Santos. You can follow Mike on Twitter @TMFKinga

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