The usually dependable Rotork appears to have succumbed to tepid oil and gas markets sending shockwaves through its more vulnerable peer group. As cash-strapped exploration companies scamper to defer and scrap projects, engineers responsible for providing the industry with essential parts have also now been kicked in the teeth.
The latest casualty was Rotork (ROR). Given the producer of devices for opening and closing pressure valves in shale oil extraction equipment generates in excess of 50 per cent of revenues from the sector, a profit warning seems hardly surprising. But it was enough to send shares plummeting 17 per cent in early morning trading on Thursday to a four-year low, from where it has continued to fall, and created a toxic ripple effect throughout its peer group.
Rotork, after all, has been considered the industry don, a status earned through its strong market position and subsequent high margins and cash generation. Those characteristics help explain why the group regularly trades at a premium to peers and why its inability to mitigate a dramatic fall in oil and gas investment has sent shockwaves through markets.
Indeed, investors, concerned by how much even quality names are getting pummelled by this tough trading environment, reacted by dumping shares in other household names vulnerable to the oil price decline. Naturally, that included Weir (WEIR), the Scottish engineer, which generates about 40 per cent of sales from energy markets. Having just recently slipped out of the FTSE 100 after a torrid run, shares in the maker of pumps and valves slid a further 4 per cent following Rotork’s announcement.
Smiths Group (SMIN), too, wasn’t immune from this sell-off. Just little over one month ago, news that a US hedge fund had bought a 5 per cent stake in the engineer conglomerate looked capable of spurring a turnaround in sentiment. But that momentary glimmer of hope soon faded after investors remembered the gloomy outlook across its end markets. One of the biggest strugglers is John Crane, which provides seals that help extract and transport oil and gas safely at extreme pressures. That segment accounts for about one-third of group sales, hence why shares in Smiths slipped a further 4 per cent after Rotork’s stinging warning.
The other name to get knocked by Rotork’s profit warning was IMI (IMI). Shares in the heavily oil-exposed industrial engineer fell 3 per cent off the news, just when markets were perhaps starting to get behind chief Mark Selway’s ambitious drive to double operating profits by 2020.
