As I noted in the May 22 issue of Down Under Digest, the mining services sector has suffered an especially hard fall as the result of a slump in global commodity prices.

Indeed, a columnist for The Australian characterized the 35 percent drop in mining services stocks over the past three months (through May 22) as “the single biggest sectoral destruction of value since the dotcom crash early last decade.” By contrast, over that same period, the S&P/ASX 200 was up 2.9 percent (on a price basis).

Given Australia’s resource-driven economy, our Australian Edge Portfolios have positions in several names with exposure to the mining services arena, including the engineering firms Cardno Ltd (ASX: CDD, OTC: COLDF) and WorleyParsons Ltd (ASX: WOR, OTC: WYGPF), among others.

According to a recent study conducted by Austmine, an association with members in the mining equipment, technology and services industries (METS), this space collectively accounts for 6.4 percent of the Australian economy and is one of Australia’s largest export sectors. Fortunately, this latter detail should provide a cushion to some of the larger mining services firms that maintain offshore operations in addition to their domestic business.

And while a longer-term decline in the Australian dollar could help these companies compete overseas, the resource boom has also inflated wages for domestic employees. That means engineering firms must be shrewd about how they deploy human capital for offshore projects. 

Domestically, the situation is tough, with an estimated 4000 to 5000 consultant engineers having been laid off since December, according to one industry insider. However, the largest firms are diversified across several different types of minerals or resources, while also branching out to non-resource industries.

Indeed, some firms, such as Leighton Holdings Ltd (ASX: LEI, OTC: LGTHF), which is in our How They Rate coverage universe, have emphasized the diversity of their operations. In addition to mining services, the engineering firm’s operations span everything from waste management to property development. The contract miner has 34 contracts covering six different commodities in seven countries.

Management recently reiterated its earlier full-year guidance of net profit after taxes ranging between AUD520 million to AUD600 million, versus AUD442.1 million last year.

During the first quarter, the company’s new contracts declined by AUD1.3 billion sequentially, to AUD4 billion. However, management stated they were focused more on winning projects with margins of 10 percent or more, rather than top-line growth.

Leighton is down 34.1 percent from its 52-week high, which it hit back on Feb. 20. Among analysts, the company has three “buys,” four “holds,” and eight “sells.” The consensus 12-month price target is AUD19.50, which is 21.8 percent higher than the current share price. Like some of its sector peers, the stock has a moderately high level of short interest, with 8.7 percent of its float held short, which is equivalent to 10.7 days of average trading volume. Leighton has a Safety Rating of 2 and is a buy below 21.

But a number of firms have recently lowered their guidance. WorleyParsons says underlying earnings will likely be between AUD320 million and AUD340 million, versus AUD345.6 million last year. The firm serves the full gamut of resources industries, including oil, gas, chemicals and minerals. CEO Andrew Wood noted that falling commodity prices, as well as changes in management at some of their largest customers have caused delays in new business.

The company’s revenue is well diversified across different regions of the world, with relatively limited exposure to Australia. The hydrocarbons division, which accounted for 69 percent of revenue for the first half of fiscal 2013 (ended Dec. 31), derived 33 percent of sales from Canada, 19 percent from the US, and 17 percent from Australia. During the first half, the segment’s earnings before interest and taxes (EBIT) were up 12 percent year over year.

The minerals, metals and chemicals division, which is WorleyParsons’ second-largest segment and accounted for 12.4 percent of revenue, understandably has greater exposure to the company’s home territory. Its Australian operations accounted for 43 percent of revenue, with Asia and Canada at 16 percent and 12 percent, respectively. Despite a challenging environment in Australia, the segment’s EBIT still grew 5 percent versus a year ago.

The infrastructure and environment division accounted for 10.8 percent of revenue and has similarly substantial exposure to Australia, which accounted for 46 percent of sales. Meanwhile, Canada and Latin America accounted for 15 percent and 11 percent of sales, respectively.

Finally, the power division accounted for 7.8 percent of total revenue. Here again, Australia delivered a substantial 35 percent of sales, with the US and Europe accounting for 31 percent and 11 percent of sales, respectively.

WorleyParsons’ stock is down 31.7 percent from its 52-week high, but is up 2.7 percent from its low on May 17. Among analysts, the company currently has eight “buys,” seven “holds,” and one “sell.” The consensus 12-month price target is AUD22.20, which is 14.4 percent above current prices. WorleyParsons has a Safety Rating of 4 and is a buy below 30 in the Aggressive Portfolio.

Meanwhile, engineering and environmental consultancy Cardno forecasts net profits to come in at AUD73 million to AUD77 million in 2013, in contrast to the market’s earlier expectation of AUD81 million to AUD82 million.

However, the midpoint of the new lower range is just 8 percent below the range analysts had previously forecast, and that compares favorably to the 40 percent-plus reductions in profit guidance from firms with higher exposure to the mining sector.

Indeed, CEO Andew Buckley notes that just 10 percent of the firm’s revenue is derived from mining. Its electrical engineering business is facing project deferrals and cancellations from iron ore and coal miners, while its coal business is enduring a wider global downturn.

Cardno is not as geographically diversified as WorleyParsons. But at the very least, it has greater exposure to the Americas than to its home country. The Americas accounted for 53 percent of first-half fiscal 2013 (ended Dec. 31) revenue, while Australia and New Zealand accounted for 41 percent of revenue, with Asia coming in at 5 percent.

The company is far more diversified in terms of the types of projects it undertakes, with the exception of environmental services, from which it derives 41 percent of revenue.

Cardno hit its 52-week low during today’s trading session. It closed down 42.7 percent below its trailing 12-month high. Given such downward momentum, the stock has high short interest, with 7 percent of its float sold short, which is equivalent to 20.8 days of average trading volume.

One of the criticisms of the firm is that its acquisition-oriented strategy has yet to produce meaningful organic growth. Over the past five years, the company has acquired 19 companies. But even after this acquisition spree, the small-cap company has a manageable AUD224.1 million in long-term borrowings on its balance sheet and AUD86.7 million in cash.

Among analysts, Cardno has four “buys” and five “holds,” with a consensus 12-month price target of AUD6.27, which is 26.6 percent above the current share price. Cardno has a Safety Rating of 6 and is a buy below 8.05 in the Conservative Portfolio.

The Roundup

Here’s when AE Portfolio Holdings will report their next sets of financial and operating numbers. Some have “confirmed” dates, while for others we’ve provided an “estimate.”

For most, this will cover the full fiscal year ending June 30, 2013. We’ve noted for others that report on a different schedule the period to which the announcement pertains.

Conservative Holdings

• Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 21, 2013 (estimate)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 21, 2013
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–July 24, 2013 (2013 H1, confirmed)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–April 30, 2013 (FY 2013 H1, confirmed)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 13, 2013 (estimate)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 21, 2013 (estimate)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 22, 2013 (estimate)
• GPT Group (ASX: GPT, OTC: GPTGF)–Aug. 12, 2013 (2013 H1, estimate)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 26, 2013 (estimate)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Aug. 22, 2013 (estimate)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Aug. 14, 2013 (estimate)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 8, 2013 (confirmed)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 6, 2013 (estimate)
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Aug. 15, 2013 (estimate)

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Aug. 22, 2013 (estimate)
• Ausdrill Ltd (ASX: ASL, OTC: AUSDF)–Aug. 28, 2013 (estimate)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 21, 2013 (estimate)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 16, 2013 (FY 2013 H1, confirmed)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 15, 2013 (estimate)
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 12, 2013 (estimate)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Aug. 12, 2013 (2013 H1, estimate)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 22, 2013 (estimate)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 8, 2013 (2013 H1, confirmed)
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Aug. 26, 2013 (2013 H1, estimate)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Aug. 21, 2013 (2013 H1, estimate)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 28, 2013 (estimate)