The Investment Column: Abbot explores growth areas

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The Independent Online
INVESTING in smaller oil stocks is usually a question of hope rather than judgment. But compared to oil exploration companies, Abbot is a pretty safe proposition. Rather than pin its hopes on making a big strike in some as yet undiscovered field, Abbot handles development drilling and inspection for large oil groups.

It's a growing business: as the oil giants attempt to cut fat, they are realising this type of operation is better farmed out to a specialist than done in-house. Unlike most exploration companies, the business is also highly profitable. The drilling side makes operating margins over 11 per cent while margins at OIS, the inspection business Abbot bought early in 1996, rose from nothing to almost 5 per cent in the first full year under Abbot's ownership.

OIS and Nabors Europe, the drilling group Abbot bought late in 1996, explained much of the group's growth last year, when pre-tax profits doubled to pounds 15.2m on sales up 47 per cent to pounds 155m. But the drilling business is also growing organically, expanding its sales 12 per cent in 1997 with the help of a few new contracts.

If there is a complaint, it is that Abbot is too dependent on work in the North Sea, where growth prospects are limited. The company is addressing that, however, by targeting the Caspian Sea region - where the oil giants are stumbling over each other to win lucrative drilling contracts - as one of its growth areas. It is also pursuing projects in North Africa.

For all its solid foundations, Abbot boasts a share price performance to match any exploration group. Since coming to the market through the reverse takeover of Unigroup in mid-1995, the shares have more than quadrupled in value.

The question, however, is how much further they will go. Sutherlands, the stockbroker, forecasts 1998 profits of pounds 18m which puts the shares, up 3.5p to 205p, on a forward p/e multiple of 23. High quality, but not worth chasing.