AMEC (AMEC) is a leading international provider of project management and support services. The company serves a diversified group of clients in both the public and private sectors, across a range of industries. In the last decade AMEC has undergone a transformation, moving away from construction and into services. In particular, AMEC is now focussing on opportunities within the oil and gas industry. We believe this sector will provide a significant source of earnings growth for AMEC in the years ahead.

AMEC's earliest beginnings date back to 1846 when Societe de Construction des Batignolles was formed in France to manufacture locomotives. The group was formally created however in 1982 with the merger of Fairclough, a stone masonry business, and William Press. AMEC has grown significantly since then through the acquisition of engineering, construction, rail maintenance and other services businesses.

Today AMEC is divided into three core divisions, the largest of which is Engineering and Technical Services (ETS), accounting for almost half of total turnover. The Project Solutions business contributes another 28 percent of turnover, and focuses on large infrastructure projects. The division is also involved in several key 'Public Private Partnerships' (PPP) and renewable energy projects. Oil and gas services represent the remaining 25 percent of turnover, but with comparatively higher margins, this business generates a third of profits.

The last 10 years have been a turbulent time for shareholders of AMEC. From the mid 1990's to 2001, global demand thrived and AMEC was a standout performer. The shares increased close to sevenfold from 51p in 1996 to an all time high of 532p in June 2001. However euphoria was soon replaced with despair as the global economic downturn began to take hold. After reaching the record high the shares lost more than 75 percent of their value over an eighteen month period. A bearish extreme was reached in December 2002 when the stock briefly touched a five year low of 125p as the deferral of capital spending by clients culminated in a profit warning.

A recovery in capital investment in the last few years has resulted in a robust rally in AMEC's share price. The company has benefited in particular from a number of contract wins in the oil and gas division. AMEC also received a significant boost last year following the successful tender for a US$1.1 billion reconstruction contract in Iraq.

We were heartened by the group's recent full year results. Pre-tax profit (before goodwill amortisation and exceptionals) rose 5 percent to £118.1 million. Total turnover grew just 2 percent to £4,816 million due to a switch towards higher margin oil and gas contracts, which earn less revenue. Overall, we were impressed by the earnings performance and growth outlook in all three divisions.

Operating profit at the ETS business rose 7.9 percent to £75.3 million. Encouragingly, AMEC expects margins to improve further following additions to the European branch network, and cost reductions in the underperforming North American operation.

Whilst AMEC's activities in Iraq made a small contribution to earnings in 2004, the potential for growth is substantial. AMEC's joint venture has already secured contracts amounting to US$730 million to restore damaged infrastructure, and the final fees could be much higher. In addition, AMEC's expertise in Iraq could result in contracts worth several billion dollars as and when stability is restored.

Looking ahead, we believe there are also significant opportunities for AMEC in the wake of a restructuring of the UK nuclear power industry. From this month the market will be open to private sector companies. The government estimates that contracts worth around £2 billion annually will be available. We believe that AMEC's reputation and expertise will bolster efforts to claim market share in this growth industry.

The Oil and Gas business delivered a robust performance with operating margins increasing to 4.7 percent from 4.3 percent. The division boasts a number of significant new contracts including the Kuwait Oil Company, the Korean National Oil Company and Woodside Petroleum in Australia.

AMEC's global reach in this sector was extended further in January following the £20 million acquisition of Houston-based Paragon Engineering Services. The deal enables AMEC to provide a more comprehensive offering to customers in the Gulf of Mexico, and will help strengthen relationships with customers such as Chevron/Texaco, Marathon and Pemex.

We are highly encouraged by the earnings outlook in the Oil and Gas division, particularly with AMEC concentrating on high value front-end design, procurement and project management services. Moving away from upstream lump-sum contracts will increased the quality and stability of earnings. Pleasingly, the order book within the division has remained robust at around £1.3 billion. We believe that the demand for oil and gas services will increase significantly in the years ahead as energy prices continue to rise.

AMEC's Project Solutions business also performed well last year with operating profit increasing 3 percent to £40.2 million. The group continued to divest select cyclical building businesses such as US Construction Management and Spie Batignolles in France. Meanwhile AMEC's 'Public Private Partnerships' business performed strongly - the portfolio is now valued at around £77 million (compared to a £42 million book value), and has achieved preferred-bidder status on projects worth over £600 million.

We believe that renewable energy also offers significant earnings growth potential for AMEC. The company is currently developing an onshore portfolio of around 1,500 MW. During 2004, AMEC submitted planning applications for major schemes at Kyle and the Isle of Lewis in Scotland, the latter being potentially the world's largest onshore wind-farm.

Last year, debt levels increased 30 percent to £450 million primarily due to several capital intensive Oil and Gas contracts, a reduction in high cash flow construction activities, and funding of activities in Iraq. However we expect significant improvements in balance sheet strength over the course of 2005. Liquidity will be boosted by a £88 million equity placing in January, and a £80 million debtor securitisation programme this month. In the meantime, current levels of interest cover are solid at 4.8 times.

From a charting perspective a sizeable rally has already unfolded. However AMEC remains well below the peak levels achieved in 2001. With solid support between 300p and 290p underpinning the stock, we believe that upside potential firmly outweighs downside risk.

In our opinion the prospects for earnings growth at AMEC are excellent. We expect the oil and gas sector will underpin long-term profitability, whilst we are also excited by new opportunities in the renewable energy and nuclear industries. We regard the current valuation fundamentals as compelling, with the shares trading on a 2005 price earnings multiple of 12 times and yielding 3.5 percent. Accordingly, we recommend the stock to all Members as a buy up to 325p.