Questor share tip: Weir Group well move looks sound

RELATED QUOTES

SymbolPriceChange
NBXB.DE0.00
APR.PA17.21-0.04
WEIGY21.71+0.16
UNGS0.0027+0.0003

Weir Group (Other OTC: WEIGY - news) buys another US shale gas business. Questor says buy.

Weir Group £18.63+51p Questor says BUY

Scotland-based engineer Weir Group has answered critics of its shale gas business by increasing its exposure to the market. Questor likes the move.

US gas prices have plunged because of the shale gas boom, prompting many players to stop drilling. Prospects for the sector resulted in Weir becoming the most shorted share in the market earlier this year. However, gas prices are expected to be higher in 2013, which should be helpful for companies

such as Weir. Short interest in Weir now stands at about 16pc the lowest level it has been this year.

Yesterday, Weir said it would buy US shale gas player Mathena, which rents out equipment to drillers, for $385m (£237m). Mathena supplies hydraulic drilling chokes and separators used in the fracking process, which releases gas from rock formations by forcing through a mixture of water, chemicals and sand. Sales are split 80pc from equipment rental and 20pc from related parts and services.

The acquisition fits nicely with other purchases Weir has made. Mathena is involved with the drilling stage of operations rather than the production part of the process, where previous purchases such as Seaboard Holdings are placed. This means that Weir will now provide services covering the whole of the process of extracting shale gas.

The forecast rise in gas prices in America from lows seen earlier this year should help Weir as it will dissipate some of the negativity that has surrounded the company because

of its operations in US shale gas. US natural gas (Other OTC: UNGS - news) prices as indicated by Nymex futures have jumped by almost 90pc since their April (Paris: FR0004037125 - news) low of around $1.90 per 1,000 cubic feet. If the wider US economic recovery remains on track this should also lift the gas price.

In the future, there is significant opportunity from the expansion of shale gas drilling worldwide. The UK has allowed fracking to restart in the North West, near Blackpool. The opportunity in Eastern Europe and China is also huge but this is not likely to be a boost for Weir any time soon.

The shares are trading on a 2013 earnings multiple of 12.5 and yielding a prospective 2.1pc.

Last tipped as a buy at the start of November (Xetra: A0Z24E - news) at £18.31, Questor maintains the buy rating.