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Oil collapse! Is this FTSE 250 firm now too cheap to ignore?

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The meltdown in the global oil market is sending the share prices of Royal Dutch Shell and BP through the floor. A former FTSE 100 share that’s also suffering because of the collapse in crude values is Weir Group (LSE: WEIR).

The engineer was in trouble long before the coronavirus crisis emerged, though. The price of its stock has more than halved during the past year because of challenging conditions in the North American oil and gas market. In 2019, hardware orders from the fossil fuel industry had tanked 30% year on year. No wonder Weir recently announced that it’s looking to divest its oil and gas operations, then.

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It looks, however, that the FTSE 250 firm may have waited too long to pull the plug. The recent collapse in Brent prices means that Weir may have a struggle on its hands to offload its battered oil and gas business. And in the meantime it will continue to suffer from frightful profits declines as US storage facilities hit their limits and benchmark prices plummet.

Oil industry in meltdown

The terrible outlook for the oil market was outlined by Chris Beauchamp, chief market analyst at IG Group today. He comments that “we are witnessing markets finally play catch-up to the reality on the ground in the oil market – huge oversupply and non-existent demand have combined with nearly-full storage facilities to drive complete dislocation in the crude oil market.

In a worrying precursor Beauchamp noted that values of the June contract are following what happened to the previous month’s contract and already falling through the floor. Both WTI and Brent contracts have fallen below $20 per barrel.

Cheap but risky

Even before this more recent collapse, Weir said late last month that business had started to dry up. Then it said that a mix of reduced black gold prices and widespread reductions in exploration and production (E&P) had damaged orders from North America.

This was not the most chilling aspect of the release, though. The engineer continued that “we expect to see continued sequential declines in activity through 2020 with E&P capex now expected to be down at least 30% year on year versus our prior expectation of 10%.”

The extreme shortage in oil storage capacity means that US producers could start shuttering oilfields with no plans to reopen them in the long term, too. Weir’s problems clearly extend beyond the start of the new decade. And things could get even worse should a collapse in commodity prices affect demand for its products from the mining industry, too. The company also said in late March that it had “seen a slowdown in original equipment orders” from minerals diggers.

I don’t care about Weir’s low price. Currently, it carries a forward price-to-earnings (P/E) ratio of below 12 times. This is a share that I’ll continue to avoid.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Weir. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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