Tuesday, 18 June 2019 01:01 GMT

Is Weir the canary in the coal mine for the US shale industry?

The metal basher Weir Group (LON:WEIR) might seem an odd starting point for an article on America’s rise back to the top of the oil charts.

But two ‘sell’ notes in as many days say as much about the state of the natural resources sector in the US as they do about the Glasgow-based pump maker.

And all is not quite rosy as the headlines would suggest. 

The unlocking of the vast shale plays in the States using horizontal drilling and fracking catapulted daily production up to 11.5mln barrels of liquid petroleum in August. 

According to the International Energy Agency that put the US just 100000 barrels behind Saudi Arabia – but experts reckon the pair swapped places last month. 

It is the first time since 1991 the US has occupied the number one spot.

However Weir in a sense is the canary in the coal mine – if this is not too clichéd.

The company is a supplier of pumps and other specialist equipment to drillers frackers and refiners.

And what brokers Panmure Gordon and Investec see is an industry drowning in debt that is on the IEA’s measure profitable at US$60-US$80 a barrel.

As the price of West Texas crude has fallen to a four-year low of US$84 a barrel so the alarm bells have gone off – not just for Weir but the industry as a whole Stateside.

Venezuela has been lobbying the oil cartel OPEC to rein back production in order to drive prices back.

However an insightful article on the Reuters news service suggests Saudi Arabia is at least happy to maintain the status quo.

Apparently OPEC’s largest producer is ready to accept oil prices below US$90 per barrel and perhaps down to US$80 for as long as two years.

This shift away from price protection is seen as being aimed directly at the US and bodes ill for the long-term prospects for the country’s marginal producers.

And worryingly the Saudis aren’t alone as analysts at Commerzbank point out.

“OPEC is still giving no indication that it might take steps to shore up prices” investors were told. 

“On the contrary Iraq is now the third important member to significantly lower its sales prices as compared with the international benchmarks. 

“OPEC countries appear to be more interested in defending their market shares at present than stabilising prices.

“Kuwait sees no need to cut production because – according to the country’s oil minister – this would not necessarily lead to higher prices.”

In fact according to Kuwait the price could fall as low as US$76 a barrel. 

It remains to be seen what the US will or even can do ease the pain. 

In the meantime companies such as Weir down 19% in the last month will continue to suffer.

Repeating his ‘sell’ advice Panmure analyst Sanjay Jha told investors: “We believe that it will be lucky to grow at all from 2015 as the (US) shale boom turns to bust. 

“Even with oil prices well above US$100 per barrel the US shale industry was drowning in debt.” 

Is Weir the canary in the coal mine for the US shale industry?


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