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Weir hit by oil price

Shares in Weir plummetted after the industrial pump maker fired a warning shot over the tumbling oil price
February 25, 2015

Shares in Weir (WEIR) fell 9 per cent after the industrial pump maker warned investors to brace themselves for a "significant reduction" in revenues and margins as energy companies slash their capital expenditure. The group, which makes valves and pumps for the energy and mining industries, has cut 22 per cent of its US workforce in a bid to reduce operating costs. Management also expects to garner £35m of annualised savings from factory closures and headcount reductions, but doesn't expect that to fully offset the impact of plummeting oil prices.

IC TIP: Sell at 1690p

This is particularly bad news considering it was Weir's oil and gas division that largely salvaged the group's results for 2014. Strip out currency headwinds and £212m of exceptional costs - including a £160m hit from an oil-related impairment charge against its pressure control unit - and pre-tax profit was up 7 per cent. Meanwhile, at constant currencies, sales and orders both grew by 9 per cent as strong oil and gas markets earlier in the year offset troubles in the mining sector.

Indeed, while revenues from the oil and gas division grew 32 per cent to £992m, plummeting demand for mining equipment after the near-50 per cent fall in iron-ore prices saw sales in the minerals division - the group's largest - fall 4 per cent to £1.1bn. The outlook isn't pretty, either: management expects capital expenditure in mining markets to slide for the third year running in 2015.

The prospects are equally grim for the power and industrials unit, which is responsible for designing and manufacturing valves, pumps and turbines for industrial and oil and gas markets. Here, adjusted operating profit plummeted 37 per cent to £19m. Moreover, adjusted operating margins fell by 360 basis points to 5.8 per cent as high-margin nuclear revenues were replaced by sales of less lucrative commercial valves. Project delays in power and waste-water markets haven't helped, and management predicts that a weak European economy will continue to subdue growth in the group's smallest unit.

Given the murky outlook, broker Investec Securities has put its forecasts under review, but indicated that adjusted EPS for the current year could fall to about 110p (from 141p in 2014).

WEIR (WEIR)
ORD PRICE:1,690pMARKET VALUE:£3.6bn
TOUCH:1,688-1,690p12-MONTH HIGH:2,848pLOW: 1,574p
DIVIDEND YIELD:2.6%PE RATIO:50
NET ASSET VALUE:691p*NET DEBT:58%

Year to 2 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20111.6427794.327.0
20122.2939113233.0
20132.5442114638.0
20142.4343115742.0
2015†2.4414933.844.0
% change+0-65-78+5

Ex-div: 30 Apr

Payment: 29 May

*Includes intangible assets of £1.6bn, or 768p a share †53-week period