Weir Group will exit the hydrocarbon industry by selling its oil-and-gas division to Caterpillar for $405 million, leaving the Scottish engineer to focus on its core mining business.
The sale is part of a strategic transformation by Weir as the oil-and-gas sector remains in a rut. Shares in the Glasgow-based group soared as much as 25% in London trading.
The back story. FTSE 250 constituent Weir made its major entry into North American oil and gas in 2007, purchasing SPM Flow Control as oil prices were approaching their zenith. In 2014, the division accounted for around half of the company’s profits.
In February the company took a £546 million ($707 million) write-down on the division amid a downturn in the North American industry, and it said it planned to “maximize value” from the business to focus purely on mining.
Weir’s announcement that it intended to leave the oil-and-gas sector came as climate change was putting increasing pressure on the industry, but before the coronavirus pandemic caused demand to drop dramatically. Oil supermajor BP said in February it planned to be net zero by 2050, and Royal Dutch Shell has since followed suit.
What’s new. Caterpillar, a Fortune 100 equipment manufacturing giant, will purchase Weir’s Texas-based division, which includes more than 40 locations and around 2,000 employees. The business primarily makes pumps and other drilling equipment. Weir said that the sale, expected to complete before the end of the year, will bring the company a $70 million cash tax benefit in the U.S.
Weir shareholders must still approve the deal, which Chief Executive Jon Stanton called “a major milestone.”
“It means Weir is ideally positioned to benefit from long-term structural demographic trends and climate change actions which will increase demand for essential metals that must also be produced more sustainably and efficiently,” Stanton said. “This will require the innovative engineering and close customer partnerships that define Weir, and it is why we are so excited about the future.”
Looking ahead. The sale provides Weir with much-needed cash to pay off debt, and the proceeds will certainly help the group reduce its leverage. While unloading the struggling division to focus on mining makes the company far more exposed to that sector, getting away from the extreme volatility of oil markets is a smart move.
Perhaps most interesting is Weir’s confidence that focusing purely on mining—a historically dirty industry—is really a climate change play. As a mining technology company it could stand to benefit if global miners take commitments to reducing carbon emissions seriously. And Weir’s exposure to copper—crucial in electric vehicles and windmills—positions it well in the long term for a broader global shift to a renewable economy.
Original Article: https://www.barrons.com/articles/weir-is-selling-its-oil-and-gas-business-to-caterpillar-its-stock-is-soaring-51601909102
