WEIR Group has highlighted tough trading conditions in US shale markets as it revealed it has cut around 450 jobs in the area recently and warned its oil and gas division’s profits would be lower than expected.

The news in a trading update from the Glasgow-based engineering group provides further evidence of the challenges faced by firms in the oil and gas supply chain amid the recent volatility in crude prices.

Weir has expanded rapidly in the US in recent years as it sought to capitalise on booming production in US shale areas.

Shale boom in US will have implications for Scottish firms

The company supplies specialised pumps used in the fracking process. This involves pumping sand and chemicals into rocks to help release the oil and gas they contain.

However, Weir’s experience suggests fracking activity has been waning, partly as a result of growth in production in the US. This has put pressure on crude prices this year.

Investment bank UBS said yesterday the Brent crude price could fall to $55 per barrel in the first half of 2020, from around $62.50/bbl. It highlighted “strong supply growth in non-OPEC states amid weak global demand growth”.

Oil price warning bodes ill for North Sea

Weir noted that shale producers in North America have made deep cuts in activity levels to help them conserve cash.

“The cash-flow discipline and tight financing conditions for operators in North American oil and gas markets intensified in the period leading to early budget exhaustion and an accelerated slowdown in demand for pressure pumping equipment,” Weir told investors regarding the third quarter.

“US land rig count fell 11 per cent and Oilfield Service Companies stacked fleets, with the number of active frack fleets estimated to have fallen 20% in the quarter.”

Weir recorded a 32% drop in oil and gas market orders in the third quarter.

“We now expect 2019 full year operating profits in the Oil & Gas division to be below our previous range,” said chief executive Jon Stanton.

After announcing a 27% fall in first half oil and gas orders, in July, Weir said oil and gas operating profit was expected to be toward the lower end of its previous £55m-£95m range.

Weir predicted then that over-capacity in the market would be worked through and said the long-term prospects for US shale remained strong.

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The company now appears to see little prospect that shale market conditions will improve significantly soon.

Citing reduced activity levels and a lack of visibility as to when market conditions will improve, Weir said it had cut 450 jobs from its North American oil and gas business reducing the total by 20%, to 1,800.

The cuts are expected to help the firm save £30 million annually. They will result in a £20m exceptional charge.

The implications of yesterday’s update may concern followers of the key oil services industry in Scotland.

Growth in demand for support services in the US has helped offset the impact of the deep cuts in North Sea activity triggered by the sharp fall in the crude price from 2014.

Aberdeen-based Wood has built a big position in the US shale market through acquisitions.

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However, Weir said international oil and gas markets had continued to recover with strong activity in Saudi Arabia and an increasing number of Eastern Hemisphere projects.

Mr Stanton said growth in Weir’s mining division and the ESCO business it acquired last year reflected the success of its integrated solutions strategy and the benefits of its exposure to related after-sales work. ESCO serves the surface mining and construction industries.

Weir won a record £100m order for a high-pressure crusher for use in a Magnetite Project in Australia in the third quarter.

The company left its earnings guidance for the minerals and ESCO divisions unchanged.

Alasdair Ronald of wealth manager Brewin Dolphin said the profitability of Weir’s minerals division had remained exceptionally resilient while the acquisition of ESCO had helped boost recurring and higher-margin aftermarket sales.

He observed: “The story for Weir continues to be about lessening its reliance on a volatile oil and gas market.”

Weir shares closed up 47.5p at 1480p.