You don't often get sunny days for listed engineering contractors, but UGL Limited (ASX: UGL) pulled one out of its hat by announcing a $120 million contract with Santos GLNG.
The stock jumped nearly 5% to a three-week high of $1.675 at the open before giving ground to be 3 cents higher at $1.63.
Good news wears off quickly in this sector due to the challenging operating conditions and uncertain outlook with weak commodity prices impacting on demand for engineering services.
The fact is the new contract isn't particularly material to UGL given its 2015-16 consensus sales forecast of $2.5 billion and the fact that the $120 million will be amortized over the life of the three-year contract.
Those looking to see a bigger bang on the back of a contract win should gaze at little known contractor Viento Group Ltd (ASX: VIE).
Shares in the micro-cap more than doubled in value to 7.3 cents this morning after it won a $40 million two-year contract with BC Iron Limited (ASX: BCI).
That's more of a significant step change for Viento as it posted revenue of $102.5 million in 2013-14.
Viento's contract is for the mining, crushing and screening of Warrigal ore at the Nullagine iron ore project; while UGL's scope of work includes maintenance, shutdown, engineering and project services for Santos Ltd's (ASX: STO) liquefied natural gas facility in Queensland.
On the flipside, recent history has shown that winning a contract is only the first of many battles. Just look at NRW Holdings Limited (ASX: NWH).
NRW is locked in dispute with the lead contractor of the Roy Hill iron ore project over cost claims and had to take a big $135 million impairment charge.
Resource clients are very sensitive to costs and they know who has the upper hand when it comes to the client-contractor relationship.
This is why I am shying away from the sector. I think it is too early to be bargain hunting at this end of town.
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