29th Apr 2015 10:56
LONDON (Alliance News) - FTSE 100-listed engineering company The Weir Group PLC Wednesday said its order input in the first quarter was dragged lower by weak demand in oil and gas markets, which it expects to continue in the second quarter and which will result in further cost cuts being made, but its shares rose as the company quelled concerns that the issues had spread to its minerals business.
Weir said group order input in the first quarter was down 9%, with revenue declining broadly in line with the fall, dragged lower by a 23% fall in order input from upstream oil and gas markets, where capital expenditure levels have come under pressure from the declining oil price. The group said its operating margin in the quarter was down 400 basis points, largely due to decline in its North American oil and gas business.
Weir has already guided that it expects revenue and margins to deteriorate this year due to the challenges posed by the oil and gas market, though has not provided any specific guidance on how much of a hit it anticipates.
The blow from the weakness in oil and gas end markets means the company is intending to take further cost-cutting actions in order to mitigate the impact on profitability, with a further GBP10 million in cost cuts set to be made in its oil and gas business.
Weir said its constant currency revenue in the quarter was down broadly the same as the input decline, though aftermarket revenue held up well as good performances in its minerals and power and industrial units offset the oil and gas weakness. Original equipment revenue was materially lower in the quarter, but the order book for the group increased, with a positive book-to-bill ratio of 1.05.
Weir said its minerals business has remained resilient, with order input rising 5% and continued aftermarket growth partially offsetting the oil and gas-related challenges. Its full-year expectations for the division remain unchanged, though it did say that mining end markets remain challenging amid a further fall in iron ore prices in the first quarter and lower production from higher-cost ore and coal mines.
Weir shares were up 3.7% to 1,803.00 pence on Wednesday, the best performer in the FTSE 100.
Capital expenditure across the mining industry did fall, though Weir said this happened at a slower rate than in 2013 and 2014, with projects still being deferred. Orders in Africa in the minerals division were flat year-on-year, with a recovery in the platinum sector offsetting weaker coal markets, while Asia-Pacific project activity declines were mitigated by resilient aftermarket demand.
Europe and South America first-quarter order input in minerals rose year-on-year, with strong aftermarket growth in South America, but orders in North America were hit by lower oil prices and pricing in oil sands and upstream-related activities.
Investec, in a note published on Tuesday, said it expects Weir to face pricing pressure in its minerals business which it had not previously highlighted. The broker said it expects a "long, slow and grinding recovery" for Weir for the next three years, with growth to be depressed and pricing pressure to increase.
Despite the resilience in the minerals business, however, reduced activity in oil and gas end markets was worse than Weir's expectations, with the US oil-directed rig count having falling by more than 50% since the start of 2015. Weir said not only was the decline greater than expected, but there remains limited visibility on when any form of recovery will emerge.
As a result, it intends to cut costs further in its upstream oil and gas-facing business, with further workforce reductions and service centre consolidations and a plan to slash GBP10 million of costs.
Within the oil and gas division, pressure pumping equipment demand dropped below levels seen in 2013's downturn, with frack fleet utilisation dropping to below 50% in the quarter, a trend it expects to continue in the second quarter. Pressure control order input also plunged due to conditions in the North American market, though Weir said profitability in the division was helped by the closure of a small manufacturing facility and other cost-cutting measures.
Conditions in downstream oil and gas markets were also challenging in the quarter, Weir said, though less pronounced than the problems hitting its North American operations.
In its power and industrial unit, order input dropped, with equipment orders falling by 34% due to large hydro and steam turbine orders which fell in the first quarter of 2014. Valve and hydro orders were both hit by project delays in mid and downstream oil and gas and power markets, though aftermarket input was higher due to a strong valves performance.
"While mining markets remained subdued, the performance of the minerals division once again demonstrated its resilience. Trading conditions in oil and gas markets were challenging through the quarter with a steeper decline in the North American rig count than the market had anticipated," said Weir Chief Executive Keith Cochrane.
"Oil and gas activity levels are still falling and we expect a further decline in divisional revenue in the second quarter. In response, the group is taking further actions to support profitability, including additional workforce reductions and service centre consolidations," Cochrane added.
By Sam Unsted; [email protected]; @SamUAtAlliance
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