FIRST-quarter oil and gas orders have plunged by 47 per cent at Weir Group but the engineering company has said cost-cutting means the division will return to profit in the second half of the year.
Shares surged by almost six per cent as Weir indicated first half profits would be ahead of expectations. Full year group revenues are now anticipated to be broadly flat on the previous year, slightly ahead of previous expectations.
Chief executive Keith Cochrane said trading conditions in oil and gas markets reflected further reductions in activity levels in all regions despite the limited improvement in oil prices in 2016.
He reported that the group remained focused on the cost reduction measures which have helped to deliver first quarter profits slightly ahead of expectations.
“As a result, we expect first half profits to be slightly ahead of market expectations," he said. "Our full year expectations remain unchanged, reflecting the slower recovery now anticipated in oil and gas markets."
Weir’s total first quarter input reduced 21 per cent compared to the prior year period, driven primarily by the oil and gas reductions. Its minerals and flow control input also reduced, but four per cent and 20 per cent respectively.
The company reported that original equipment orders in its oil and gas division were down 40 per cent and aftermarket orders were 49 per cent lower.
It also reported that further reduced demand for pressure pumping and pressure control equipment in the US meant that approximately 70 per cent of the North American frack fleet now idle.
The continued declines in activity levels mean that, while visibility remains low, a slower than previously anticipated recovery through 2016 is now anticipated with slightly lower full year constant currency revenue expectations as a result.
Operating margins will be further impacted by negative operational leverage, with an expectation that profitability of the division will improve modestly in the second half. The division is expected to remain cash generative in both the first and second half of 2016.
Mr Cochrane told Reuters that fall in drilling activity and recent uptick in oil prices would encourage customers to place new orders. “If they want to keep producing they need to start spending money again,” he said.
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