Monadelphous share price headed for 10-year lows

Monadelphous Group Ltd (ASX: MND) could see its share price hit its 10-year low of $4.66, if current trends continue.

In mid-afternoon trading, Monadelphous’s share price is down 3% to $5.84 compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down just 0.2% for the day.

By current trends, I mean falling commodity prices, including energy. And that’s despite winning a number of new contracts of late, including Shell Australia’s Prelude Floating Liquefied Natural Gas project (FLNG) worth more than $200 million, and a two year contract for services on the North West Shelf’s Karratha Gas Plant, operated by Woodside Petroleum Limited (ASX: WPL).

The key problems Monadelphous faces are:

  1. Both minerals and energy commodities prices are falling, forcing miners to drastically cut costs and the company has exposure to both
  2. The commodities crunch also means less explorers are active, which will have an impact in later years, when old projects mature, and there’s no new projects to replace them with.
  3. Contract margins are being squeezed, with mining services companies lucky enough to win contracts likely doing it at very close to cost price – if they are lucky.
  4. Mining services companies, desperate to stay alive may well underbid contracts just to get the work.
  5. If the resource companies can’t cut costs enough, resources and energy projects will be forced to close, or suspend operations like BC Iron Limited (ASX: BCI) was forced to do today. That means less clients and less work.
  6. Winning new contracts is a good sign for a contractor like Monadelphous, but even if the company provides the estimated value of the contract, that doesn’t necessarily mean it will be profitable.
  7. Resources and energy capital expenditure is forecast to continue falling into 2017, before staging a recovery in 2018.
  8. Monadelphous says first half revenues are expected to be down 10% for the six months to end of December 2015 on the six months to June 2015.

Markets don’t always act rationally, and we could see a period where prices for commodities mean virtually every miner is making a loss. They in turn will turn the screws on their contractors.

Foolish takeaway

Monadelphous has proven itself to be the standout mining services contractor over the past decade or more thanks to strong returns on equity and earnings growth. Unfortunately for shareholders, that’s no longer enough, with the whole sector negatively affected by less work and lower margins.

Look out below.

Forget Monadelphous for now - Check out uur Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.