The Weir Group PLC And BP plc: The Perfect Oil Sector Partnership?


With the price of oil declining by up to 25% during the course of 2014, it’s been a tough year for oil companies such as BP (LSE: BP) (NYSE: BP.US). Indeed, shares in the company have fallen by 10% since the turn of the year, with sentiment also being hit by Russian sanctions and a rejected appeal by US courts regarding the Deepwater Horizon oil spill compensation claims.

Meanwhile, oil and gas support services company, Weir (LSE: WEIR), has fared much better during the course of the year. Shares in the engineering solutions play have been up by as much as 30% in 2014, but have slipped back in recent weeks so that they are now up just 2.5% year-to-date.

Upbeat Results

Today’s interim results from Weir were highly encouraging. The company confirmed that full-year expectations remain unchanged and that third quarter input growth was up 14% in constant currency. Furthermore, all three of the company’s main divisions showed positive levels of aftermarket orders, with oil and gas having a particularly strong showing with an increase of 44%.

In addition to strong results, Weir also announced the commencement of a company-wide efficiency programme. This will involve the closure of five small manufacturing facilities during the course of 2015 and consolidate a number of service centres, with workforce numbers also being reduced. The end result is expected to be cost savings of around £35 million in 2016, which will help Weir to expand its bottom line moving forward.

Relative Strengths

As mentioned, BP has endured sustained negative news flow in 2014, surrounding Russian sanctions (due to it holding a near-20% stake in Russian operator, Rosneft), the rejection of an appeal regarding compensation claims for the 2010 oil spill, as well as the falling price of oil. As a result, BP’s current share price is hugely attractive, with it currently having a price to earnings (P/E) ratio of just 9.8. With the FTSE 100 having a P/E ratio of 13.8, there seems to be considerable scope for an upward rerating and, with a yield of 5.6%, BP looks like a top income play, too.

Meanwhile, Weir Group offers strong growth prospects. It is forecast to increase earnings by 9% next year, which is considerably higher than the wider index’s expected growth rate. While Weir trades on a P/E ratio that is high relative to the FTSE 100, with it currently standing at 15.4, it has historically been much higher (as much as 19.5 during the course of 2014) and, as a result, there is also the potential for a higher rating for Weir, too.

Looking Ahead

While a lower oil price is likely to hurt oil producers such as BP moving forward, a reduction in profitability in the wider sector is likely to hurt support services companies such as Weir, too. However, with Weir having a diversified business that also focuses on minerals and power & industrial divisions, it could be better shielded from further oil price weakness than companies such as BP. Furthermore, with its strong growth potential, Weir could prove to be a sound growth stock moving forward.

Indeed, this combination of strong and diversified growth, coupled with the ultra-cheap share price of BP and its highly desirable yield, could make investing in both companies turn out to be a superb partnership. Certainly, there will inevitably be lumps and bumps ahead, but for longer term investors, BP plus Weir seems to firmly tick the value, income and growth boxes at current price levels.

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Peter Stephens owns shares of BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.