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Weir running with the Frack Pack

Douglas Fraser | 09:37 UK time, Thursday, 5 May 2011

Other chief executives might dream of having Keith Cochrane's biggest worry - ensuring he can handle a bulging order book.

That's the view from the headquarters of Weir Group in Glasgow, as he sets out a rudely healthy set of first quarter results, fuelling a 6% uplift in profit expectations for the year.

Of the three divisions - supplying engineering equipment and valves for the mining, oil and gas and power utility industries - it's the hydrocarbons that are taking off explosively.

It may not be on the scale of the Glencore float, but it says much about the same booming raw materials and commodities markets.

Two years ago, the oil and gas division was doing $200m (£120m) of business. It's already risen to $400m (£240m), and it's heading towards $700m (£420m). Following record figures in 2010, the latest numbers show orders in that division up a staggering 129% on last year's first quarter.

Getting the supply chain right and maintaining quality, while taking on another 500 staff and investing $40m (£24m) on expanding its Fort Worth base is a big management challenge. It's probably tougher for a company with such a widespread global footprint, in 70 countries, with 26 manufacturing sites and 100 service centres.

Horizontal drilling

The Clydeside company has market leadership in the kit required to "frack" shale rock for gas, and increasingly for oil. In America's drive for new sources of domestically-produced energy, fracking, or hydraulic fracturing of rock, is where it's at.

And it's moving fast. The technology now relies on horizontal fracking. That means drilling a well into a rock seam 10,000 or so feet underground, then drilling the borehole horizontally along it.

Blasting it with water, sand and chemicals forces gas and oil out of the rock formation. Weir Group's pumps then get it to the surface.

The idea's not new, but it's been expanding rapidly in the past few years, revolutionising the gas market in the USA. It's had a global impact in depressing prices for gas worldwide, while decoupling it from its link to crude oil prices.

Now, the focus is on oil reserves, and not only in the Texas basin but with huge potential in the Dakotas. With the technology being rapidly adapted to double the level of pressure being exerted, the potential reserves are growing.

But with that pressure - up to 15,000 psi - comes a lot of wear on the equipment, which is where Weir Group has been cashing in on selling spare parts and after sales from its 26 services centres across North America. Through the downturn, the industry cut back on capital expenditure, but now, it's taking off again.

Ground water

One other factor that might flag up some concern is that environmentalists believe fracking is not only energy intensive, but it could be damaging to ground water. Under the Bush administration, it was barely regulated, but with the US media pursuing concerns about health impacts, there's now a review by the US Environment Protection Agency, which is due to report next year.

Keith Cochrane sounds relaxed about the possible threat to this boom industry. However damaging to the environment, the logic of delivering a domestic supply of oil land gas to meet America's energy security desires is hard to argue with in Washington.

With US growth rates slowing up to about 7% per annum, the next big prospect for fracking and shale gas is in China, with the potential to unlock reserves as big as North America. Weir Group recently formed a joint venture there, and has made its first sale.

He's equally relaxed about problems in the nuclear industry, where Weir Group does only about 2% of its business, supplying safety valves.

Following the Fukushima disaster in Japan, the industry's taking a pause to review safety. But at Weir Group, they don't anticipate that lasting much more than a year, before new projects get under way again. This is a three-year supply cycle, so while orders may be down on 2010, it may not make much difference to Weir Group operations.

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