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.
Plexus shares tumble as oil well technology firm highlights pressure on sales
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.
Wood rates top oil services sector pick after diversification drive
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.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here