Affected by the Oil/Gas Price slump? Weir, Petrofac and IDOX

I don’t think any investor will be unaware that the price of oil has fallen off a cliff in the last few weeks. It was good to hear at the IDOX AGM this morning (26/2/2015) that the impact on their business was relatively minor – they supply engineering management information software plus public sector software and the former does have about 11% of sales in the oil/gas sector. The share price barely moved after a positive announcement in the morning that trading was in line with management’s expectations.

Incidentally this is one company that employs a serving Member of Parliament, Peter Lilley, as a non-executive director. After Sir Malcolm Rifkind M.P. suggested he needed other work to live on as his parliamentary salary was insufficient, it has become something of a political debating topic. Should M.P.s do consultancy work or take other jobs? Although Mr Lilley received a substantial number of votes against his re-election at IDOX this was probably more to do with the fact that he had been on the board since 2002. There is a full report on the IDOX AGM on the ShareSoc Members Network.

But yesterday was a different scenario with Weir and Petrofac reporting full year results. Petrofac reported an increase in profits and revenue over the previous year and said the results were “consistent with their previous guidance”. They also maintained their dividend. As they develop large engineering projects you would have expected that they would be severely affected by the slump in oil prices but they reported a record backlog of orders.

The share price had indeed slumped in recent months (as had Weir’s), but it started to bounce back in mid-January when it looked like the oil price had a least bottomed out. On the day of the results announcement it was up 72p (i.e. 9%).

Weir was a very different outcome even though they announced an increase in their dividend (which is usually a good indication of a board’s view of the future). They sell pumps mainly to the oil and mining sectors. Despite their results report being “in line with expectations” (in fact slightly better than analysts forecasts) the share price promptly dived ending up down 9% on the day. Perhaps the killer was that the announcement included the statement: “While visibility in oil and gas remains limited, it is clear that the Group’s strategic progress and cost initiatives will only partly offset the impact of a substantial reduction in demand and the associated pricing pressure.  As a result we are planning for a significant reduction in constant currency Group revenues and lower operating margins in 2015. However, we will continue to invest in extending the Group’s global leadership positions and increasing market share, supported by a strong balance sheet and the cash generative nature of the Group.”

But it’s worth pointing out that analysts had already forecast significant reductions in earnings for both companies, particularly in 2016 for Petrofac and 2015 for Weir. So surely this was old news at Weir? The company does have shorter lead times on orders of course as against the big projects of Petrofac.

You can also listen to the Weir results announcement, and the subsequent question/answer session on their web site but it does not really explain the larger share price impact a lot more. Perhaps it was simply that the Petrofac “outlook” statement in their announcement was a bit more bland.

It can be one of the mysteries of stock market investment as to what influences share prices. It can be simply confounded expectations  – perhaps expectations of better news than materialised or a more dour presentation style from the management.

Both companies operate in a sector that is cyclical in nature and driven by the price of the oil commodity, but Weir has traditionally had a higher rating than Petrofac perhaps because contracting businesses such as Petrofac are subject to large swings in orders and other factors around the company. But both now seem to be getting to low prospective price/earnings ratios presumably on the basis that there will be no quick recovery of the sector (as Weir specifically indicated).

Roger Lawson

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