ENGINEER Weir Group has declared oil prices will strengthen again but it does not know when, after reported a near-halving of annual profits caused in large part by reduced North American shale activity.
The Glasgow-based company announced further heavy job cuts in North America, in operations focused on equipment for the shale oil and gas sector, as it unveiled a 46 per cent drop in underlying annual pre-tax profits to £220 million. Its revenues dropped to £1.92 billion in its financial year to January 1, from £2.44bn in the prior 12 months.
Weir Group revealed it had booked £365m of operating exceptional costs in 2015, including a £225m impairment relating to its oil and gas operations.
It said the impairment charge had arisen from the “prolonged downturn facing oil and gas markets, and the resultant impact on the North American rig count and related activity levels”.
Underlying operating profits, before finance costs and excluding exceptionals, dropped from £450m to £259m.
And chief executive Keith Cochrane, warning that 2016 would be “another challenging year”, said that Weir Group was planning for a further reduction in operating profits in constant currency terms, driven primarily by lower activity levels in upstream oil and gas markets.
However, Weir Group flagged the “resilience” of its minerals division, which provides equipment and servicing to the mining sector. It noted that after-market revenues had been stable in this division.
Activity in the global oil and gas industry has been hammered by the tumble in crude prices which began in 2014.
Asked about the outlook for the price of oil, Weir Group finance director Jon Stanton replied: “My view is that it will pick up. I have no idea when. The industry is going through extreme pain. At the moment, a huge amount of investment has been pulled – something like $400bn of capital investment has been pulled back. All players in the industry….are continuing to take costs out.”
He added: “Oil is a depleting resource, reducing by seven to eight per cent a year. In a time when we are not reinvesting in replacing these resources, at some point that is going to have to put pressure on the price to go back up.”
Mr Stanton emphasised his view that the North American shale sector would be a good place to be to benefit when this happened, given shorter lead times for production.
Weir Group has in recent years acquired several businesses focused on the North American shale oil and gas sector.
Asked for his view on Weir Group’s acquisition strategy, with the benefit of hindsight, Mr Stanton replied: “When you look at it, there is no secret about what we do. We are upstream exposed in both oil and gas and minerals because of the nature of our products and business models and the resources we have.
“Over the long term, they are structural growth markets and a great place to be.”
Weir Group yesterday unveiled an additional £40m cost reduction programme for 2016.
A spokesman for the company said this would involve reducing employee numbers in Weir Group’s North American oil and gas operations by about 150 in the first half of this year.
He added that about 40 posts would be cut in Weir Group’s minerals division.
Weir Group has a total workforce of more than 14,000.
Mr Stanton underlined Weir Group’s view that the UK should remain a member of the European Union.
He said: “The corporate view is that we are very much in favour of ‘in’.”
Contemplating the run-up to the referendum called by Prime Minister David Cameron for June 23, Mr Stanton added: “We are in for a period of quite a deal of volatility.”
Mr Stanton, citing the potential impact on the pound as an example, said a vote to leave the EU “could mean there will be volatility in years to come, which we don’t think would be at all helpful”.
Weir Group came out strongly in favour of the Union in the run-up to the September 2014 referendum on Scottish independence.
Asked whether Weir Group had a view on talk that a vote for the UK to leave the EU could trigger a second Scottish independence referendum, Mr Stanton replied: “One at a time is pretty much the view – focused on the EU and see where we get to.”
Weir Group held its total dividend for the year at 44p-a-share, with a final payout of 29p. Its shares finished 0.5p higher at 902p yesterday.
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