Just as Weir Group seems to overcome one challenge, another appears and forces management to adjust their focus.
Having suffered in the oil and gas downturn, Weir shares jumped eight per cent earlier this month when the group increased forecasts based on the recovery of the shale gas market in the US.
In the UK there has been intense debate over shale exploration, and more people oppose than support its development while in Scotland there is a moratorium in place preventing development.
The US, however, was not shy in drilling down into the shale rock and after a period which saw the rig count reduce from 2,000 to 400, fracking activity is booming again. The $50 oil price has made extraction more economically attractive, and this month estimate suggest 5.5 million barrels per day are being pumped out of the ground in the US.
Weir’s interim results certainly confirmed the positive impact of that accelerated recovery to the group’s earnings, with a £2m loss in its oil and gas division in the first half of 2016 swinging to a £32m profit, but this was offset by a 13 per cent fall in operating profit in its minerals division, which fell to £105 – always halving the gains made in oil and gas.
With revenue flat, Weir’s challenge is to work the operating margin, which fell by 260 base points. With Weir’s chief executive Jon Stanton highlighting that £15m investment readies it to “take full advantage” of an increase in sustaining and replacement capex, it would seem the afore-mentioned focus is just where it needs to be.
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