Shares in British oil services group Wellstream (WSML) fell sharply after it said its second half will be worse than expected, as funding constraints and oil price volatility force producers to delay contracts.

The company, which makes pipes for the oil & gas industry, said on Thursday it thought earnings for the six months to end December would be slightly ahead of the first half, but worse than originally hoped.

Wellstream shares, up more than 50 percent this year, were down 12.3 percent by 0841 GMT at 471.4 pence a share, valuing the business at 470 million pounds ($773.9 million).

For independent (oil firms) it has often been a funding issue. Customers are dragging out negotiations with all suppliers while they hope funding will come into place, Chief Executive Gordon Chapman told Reuters.

He added that the group saw a recovery some time later in 2010, but until at least the end of the year would try to maintain an order book of around 215 million pounds ($354 million) -- down from nearly 300 million this time last year.

Chapman said a lower price of oil had also hurt trading as producers are drilling less ambitious projects and therefore need less sophisticated piping. An exception is the group's biggest market, Brazil, which is still booming.

Oil prices soared to a record $147 a barrel by mid-2008 before collapsing to less than $40. The price currently stands at just over $72 a barrel.

Although the group will suffer from the downturn in activity, we believe it is exceptionally well placed with its Brazilian operation, which is located in one of the few areas in the world where there is a significant increase in activity, Panmure analyst Peter Hitchens said in a note.

Wellstream reported first half pretax profit of 24.5 million pounds ($40.34 million), down from 40.8 million last year, hit by several issues including a 7-8 million pound write-off due to supplier problems in Newcastle, North-East England.

The half-year dividend was held at 4 pence a share, but Chapman said it was too early to say whether the full-year payout was under pressure.

Rivals including Lamprell (LAM) and Petrofac (PFC) report half year results next week. (Reporting by John Bowker, Editing by Matt Scuffham and Rupert Winchester)

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