3 years ago




Strategic Report: Operational Review OPERATIONAL REVIEW WEIR OIL & GAS Steve Noon Divisional Managing Director In 2013 the division continued to make progress in pursuit of its key strategic objectives, despite further challenges in the pressure pumping market. By increasing operational efficiency, leveraging our service centre network and maximising the benefits from our complete product portfolio, we were able to more fully capture aftermarket opportunities. Market drivers In North America tight oil production continued to grow strongly. The US government now estimates the US will shortly overtake Saudi Arabia as the world’s biggest oil producer. Throughout the year WTI oil prices remained above incentive levels but traded at a discount to Brent because of US infrastructure constraints and restrictions on exports. Gas prices stayed below incentive levels. In Canada, an extended spring break and flooding in Alberta adversely impacted the market. These factors contributed to a slower recovery in North American upstream markets than had been anticipated by the industry, with the number of wells drilled stable from the second quarter of 2013 onwards. Increased drilling efficiencies meant well count declined by 3% despite a 9% decline in average rig count, as pad drilling enabled each rig to drill more wells. Oil and liquids drilling increased to 79% of drilling and completion activity, emphasising the continued move away from gas, where rig count fell by 14%. Wells drilled, the key driver of our business, supported demand for pressure pumping and pressure control products. In pressure pumping markets, frack fleet utilisation is estimated to have improved marginally to 76% by the end of the year but remained below the level required to stimulate an increase in original equipment demand. There was a reduction in customer inventory levels, with demand for shorter cycle aftermarket products and services normalising. International pressure pumping markets continued to grow strongly, particularly in China, which saw a 73% increase in its frack fleet. Pressure control markets declined slightly reflecting the number of wells drilled and the switch from gas to oil rich basins which are typically lower pressure and require less complex solutions. In the Middle East, services markets continued to grow with average rig count increasing by 5%. Iraq offered significant opportunities as the country continued to rebuild its oil and gas infrastructure. In mid and downstream markets there were good opportunities in Liquified Natural Gas (LNG) and Floating Production, Storage and Offloading (FPSO) sectors, although the core refining market remained subdued. 36 The Weir Group PLC Annual Report and Financial Statements 2013

Overview Strategic Review Operational Review Corporate Governance Financial Statements Market input breakdown Market input breakdown Oil & Gas 99% Industrial 1% Geographic input breakdown Geographic input breakdown North America 70% Middle East/Africa 15% Europe 8% Asia-Pacific 4% South America 2% Australasia 1% Key priorities and progress in 2013 Develop aftermarket business model and bundling strategy in Pressure Pumping Continue momentum in new product development Capitalise on growth opportunities in Saudi Arabia and Iraq • Dedicated aftermarket sales team established with positive impact across all aftermarket product streams. Aftermarket input up 32% in Pressure Pumping, with fluid end valves and seats especially strong, reflecting the benefit of the Novatech acquisition in early 2012. • Duralast and stainless steel fluid ends released across the full frack pump range, assisting recapture of market share in this category. • Gabbioneta completed development of a high capacity vertical pump for downstream applications which has the highest specific speed rating ever designed by the business. • Seaboard developed a unique overshot system for subsea well kill applications. • Input in Saudi Arabia and Iraq was up more than 40% year on year (including joint ventures), as we took advantage of growing oil and gas production. Capture Seaboard domestic and international growth opportunities Integrate and realise the benefits expected from the Mathena acquisition Enhance Pressure Control offering in North America upstream markets Increase supply chain flexibility and reduce working capital • The business secured its first Australian revenues with further orders expected in 2014. • The customer base was broadened and the business grew wellhead revenues in challenging market conditions. • Mathena was successfully integrated and has broadened its reach and extended its share of rigs across North America to over 400, up 26% year on year, in what was a declining market. • We successfully launched our flowback and zipper rental service streams towards the end of the year, giving us the platform for organic growth in 2014. • In absolute terms the division reduced like for like working capital by £2m. Strategic progress In 2013, we responded to the slower than expected recovery in upstream markets by increasing our product range and leveraging our industry-leading service centre network to grow aftermarket revenues. That network was a real source of competitive advantage for Pressure Pumping allowing us to gain market share and leverage our complete product portfolio through the provision of integrated aftermarket products and services. We also made significant changes to ensure continued operational efficiency. Pressure Pumping manufacturing was consolidated in Fort Worth, Texas, allowing the closure of two small satellite manufacturing units. These initiatives partially offset the impact of pricing pressure, particularly in frack pumps and legacy fluid ends. Internationally, Pressure Pumping increased market share in China as it benefitted from the extension of the locally manufactured product range and targeted sales initiatives; capturing both original equipment and aftermarket opportunities. In Pressure Control, we launched a zipper frack manifold product which is used in pad drilling and contributes to the material efficiency gains seen from this technology. Seaboard also launched a frack flowback offering which combines elements of both the Pressure Pumping and Pressure Control portfolio to safely and efficiently manage the initial flowback of water and solids from completed wells. Additional resources were also invested in Seaboard to increase service and operational capabilities. The Weir Group PLC Annual Report and Financial Statements 2013 37

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