ENGINEERING group Weir has blamed the worst downturn in the energy sector for three decades after revealing a 40 per cent slide in first-half profits.
The Glasgow-based firm posted a pre-tax profit of £108 million for the 26 weeks to 3 July, down from £182m a year ago, as revenues dropped 13 per cent to £1 billion.
In response to a reduction in activity in the wake of the fall in oil prices, Weir has slashed its North American workforce at its oil and division by almost 900 people – a third of the total.
Further moves aimed at reducing costs are expected to deliver annualised savings of £85m by the year-end. Chief executive Keith Cochrane said: “This is the most severe downturn in oil and gas markets for nearly 30 years, and as a result North American upstream activity has reduced substantially.
“Reflecting our ongoing confidence in the long-term structural growth prospects of our markets, we continue to invest in our strategy and extend our global leadership positions.”
Revenues at Weir’s oil and gas division, which accounts for about a third of the group’s total sales, dropped by 30 per cent on a like-for-like basis to £328m, as the halving in crude prices since last year led to “significant” reductions in sector activity.
At the mineral arms, which makes up more than half of the firm’s total revenues, sales were down 8 per cent at £522m amid continuing declines in capital expenditure among clients.
Andrew Carter, an analyst at RBC Capital Markets, said today’s figures fell short of City hopes, but the outlook pointed towards a “sequential improvement” in the second half.
He added: “Normal seasonality in minerals will account for some of this but also a more pronounced recovery from the mining strike in South Africa last year. In oil and gas, the company expect a stabilisation and a reduction in equipment cannibalisation rates. The operating margin should be supported by better overhead recovery rates.”
Brewin Dolphin analyst Nicla Di Palma said that the low oil price environment “remains a concern”, although upstream markets have shown some signs of stabilisation in recent weeks.
She added: “Weir mentions that some customers plan to increase activity later this year, although again this remains uncertain. The surprise in the statement is that second-half margins are expected to be below first-half levels, due to the full impact of pricing pressures, which should be partly offset by price reduction measures.”
Despite the plunge in profits, Weir held its interim dividend, to be paid on 6 November, steady at 15p a share.
Cochrane said: “Looking ahead, oil and gas will continue to be tough, with industry expectations of a modest improvement at best in North American activity levels towards the end of the year.
“However, with the normal seasonal bias of the minerals and power and industrial divisions, increased restructuring benefits, further cost savings and a good contribution from recent acquisitions, we expect a meaningful sequential improvement in our financial performance in the second half of 2015, alongside continued strong cash generation.”