Oil engineering sell-off "overdone" despite drop in crude, says UBS

UBS has eased concerns among investors about the recent sell-off in the energy services sector, saying that share-price reactions have been “overdone” despite plunging oil prices.

With crude having dropped over 40% sharply over the last few months - falling to fresh five-year lows on Wednesday - the market has been worried that producers will scale back or delay spending on projects.

However, potential cuts in the oil and gas sector “don’t derail the investment thesis” for UK engineering stocks, UBS said.

“Since the West Texas Intermediate oil price fell below $90, the share prices of oil and gas-exposed names in our group have fallen by anything from 2% (IMI) to 22% (Weir).

“We note that further oil price weakness could create further sentiment risk. However, we see attractions in the group on the back of this,” the bank said.

With the exception of Weir, UBS said that the markets has overreacted to oil price-related concerns with the potential impact on profits generally limited to the low-to-mid single digits.

Furthermore, it said that the sector “may actually benefit via lower oil prices stimulating economic activity, and also from lower energy costs”.

The bank said it doesn’t expect a “cliff” in capital expenditure (capex) to directly affect the engineers. While exploration capex is likely to be cut signficantly - an area where engineers have limited exposure - mid-stream projects are always linked to long-term assumptions for the oil price so “cuts aren’t likely to be felt in the near term”.

UBS said: “In the context of oil-price-specific weakness, we see attractions at Rotork (upgraded to ‘buy’ in October) and Weir. Other top picks we would highlight in the wider coverage are Bodycote, Spirax-Sarco and Tyman. Smiths remains ‘sell’-rated.”

Weir, however, is more “at risk” given its large footprint to the US shale market.