Moody's cuts Weir's credit rating as weak oil weighs on end markets

Moody's downgraded the long-term ratings of engineer Weir Group to Baa3 from Baa1, keeping the outlook at negative.

The ratings agency said Weir was battling a severe downturn in its mining and oil and gas end markets due to “unprecedentedly low” base metals and oil prices, which have led its customers to scale back their investment in new equipment.

It said the company’s oil and gas business, which focuses on pressure pumping and pressure control products, has suffered the brunt of the investment cuts.

Martin Fujerik, Moody's lead analyst for Weir, said: "The rating action reflects our expectations that Weir's credit metrics will remain well below levels commensurate with a Baa1 rating at least through 2017.

The ratings agency reckons Weir's Moody's-adjusted debt/EBITDA and Moody's-adjusted EBITA margin will be around 5.0x and 8%, respectively, for 2015.

"If adjusted for around €120m restructuring charges, the metrics would be around 3.5x and 13.5%, respectively. These metrics might weaken further in 2016, and, therefore, a major improvement in credit metrics through 2017 towards levels we set for a Baa1 rating (2.0x and 15%, respectively), has become very unlikely.”

Moody’s noted that input at Weir’s oil and gas division dropped around 50% year-on-year in 2015. Even the usually more resilient aftermarket business suffered a significant decline on the year – around 40% – on the back of low activity levels.

The agency said the current downturn represents a structural shift in operating environment and forecasts the price of Brent crude to improve only slightly to $33 this year and $38 the next.

“This is unlikely to be enough to support major improvement in activity and increase in investments in the US upstream oil industry through 2017,” it said.

The ratings agency kept its outlook at negative pointing to few signs of stabilisation and fairly low visibility in the oil and gas business, which enhances the risk of underperformance and further reduction of Weir's headroom under the net leverage covenant through 2016.

At 1555 GMT, Weir shares were up 2.3% to 954.40p.