Weir Group no longer distracted by volatile oil & gas division, analysts say

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Weir Group PLC (LON:WEIR) shot up on Monday after exiting the oil & gas market by offloading its division to Caterpillar Inc for US$405mln (GBP314mln).

The engineering company said in February it was mulling over a potential sale after writing off its value by GBP546mln.

READ: Weir Group to exit oil & gas division in US$405mln deal

The FTSE 250 group was a supplier to shale operators in North America, which have been struggling even before the coronavirus crisis pushed oil prices to the bottom of the barrel.

The deal, perhaps accelerated by the pandemic, has been announced before than expected and the price remains “reasonable” according to Shore Capital, which in February evaluated the segment at GBP435mln.

“The relatively modest amount of cash generated by the sale of a business which, as recently as 2018, generated nearly GBP100mln in profit probably reflects the fact it is being sold at the bottom of the cycle,” AJ Bell investment director Russ Mould noted.

Nonetheless, the market welcomed the move, which takes pressure off the balance sheet and reduces the leverage.

Management is no longer distracted by a volatile business and can now focus on become a pure-play mining equipment business underpinned by sustainability values and technology advancement.

Investec is positive on Weir as demand in its core markets should demonstrate relative resilience given major miners’ output forecasts, while it would take a significant change in dynamics or a prolonged Covid-19 impact to breach covenants.

The bank and wealth manager said it is “a major positive event” which should enhance future returns and operating metrics.

“While oil and gas is a victim of a move away from fossil fuels, mining could benefit,” Mould commented.

“Weir clearly expects continued demand for metals in the production of items like renewables infrastructure and electric vehicles.”

Shares shot up 19% to 1,520p on Monday afternoon.

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