Share tip of the week: buy into oil's picks and shovels
By
Tim Price Jul 18, 2008
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This is hardly a normal market environment and, given the severity of the recent sell-off in equity markets, recommending any stock with conviction requires an unusual degree of courage. But out of crisis comes opportunity, and there are still some compelling investment themes for the long term. Perhaps the most compelling of all is energy.
In March, around the time Bear Stearns was struggling for survival, Tim Bond, head of asset allocation strategy at Barclays Capital, suggested that the recapitalisation of the international banking system would cost anything up to $1trn ($1,000bn) – obviously a huge amount. But that figure, he reckoned, would be dwarfed by prospective capital requirements in the resource markets. Bond cited estimates from the International Energy Agency that the global energy sector would need real investment of $22trn over the next two decades to meet the anticipated rise in primary energy demand. In other words, if you thought the financial crisis was a big story (and it is), the energy sector story is more huge still.
During the dotcom boom, it became conventional wisdom to refer to the California gold rush. According to folk memory, those who thrived were not those who backed individual prospectors. The successful investors were the ones who backed sellers of "picks 'n' shovels" – those who enabled the prospectors to search for gold. For example, jeans-maker Levi Strauss is said to have earned his fortune by selling his hard-wearing trousers to Californian miners.
Weir Group (WEIR), rated a BUY by Merrill Lynch
Given the new gold rush for energy and oil, it seems prudent to adopt the same approach today: to back businesses that enable global resource-sector giants to search for energy and natural resources. Oil firms have been somewhat lacklustre investments. Over the last five years, for example, BP shares have risen by just 11% a year. The oil price, by contrast, has shot up by more than 350% – or the equivalent of 35% a year. That performance has been matched by the shares of Weir Group, a key provider of engineering products and services for the oil and energy industries. I suspect that sort of share-price performance is sustainable even in the face of an oil- price correction, which seems well overdue. Weir's management is also highly regarded.
Weir is organised around three specific units: minerals, oil and gas, and power and industrial. The group foresees improving prospects for each of these areas. Chief executive Mark Selway, in a trading update in June, indicated that the company would see core earnings rise by around 36% from last year's levels after the sale of Weir Pumps to rival Clyde Blowers last May. Weir's clients include a number of major international miners as well as BP, BAE Systems and the Ministry of Defence. Analysts at one of my favourite brokerage boutiques, McCall Aitken McKenzie, have Weir Group as a 'high conviction buy' in their favoured sector of energy support services.
The business is capitalised at £1.8bn, but was briefly valued at more than £2bn after its trading update in June. Twenty brokers cover Weir; ten, according to Bloomberg analytics, rate the stock as a 'buy', including Asad Abedi of Merrill Lynch, with six as 'hold' and just four as a 'sell'. In the interests of full disclosure, I own Weir stock, both in my personal portfolio and in our client portfolios.
Recommendation: LONG-TERM BUY at 844p
• Tim Price is Director of Investment at PFP Wealth Management. He also edits The Price Report investment newsletter.
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