Questor share tip: Weir continues to outperform

Weir Group could benefit from the development of new shale gas resources. Questor says buy.

Weir Group
£17.84 -13p
Questor says BUY

LAST week, the US Energy Information Agency (EIA) released a study that showed that recoverable shale gas outside the US could boost global gas reserves by 40pc.

It said that in 48 shale basins across 32 countries there were technically recoverable shale gas resources of almost 170 trillion cubic metres (tcm).

The report did look at reserves in Russia or the Middle East, so the actual amount of recoverable gas could be much more.

Of course there are lots of environmental problems with the recovery of shale gas.

That’s because the process to get the gas out of the ground involved fracturing the rock in which the gas is contained by forcing water and sand through the geology in a process known as “hydraulic fracking” .

However, shale gas has enormous potential as a source of energy for the future.

This presents an enormous opportunity for makers of hydraulic equipment, such as Weir Group. As Morgan Stanley pointed out yesterday in a note to clients, the data “highlight the potential growth opportunity for equipment manufacturers like Weir Group.”

Weir, which manufactures pumps, valves and systems for the oil and gas and mining sectors, is likely to be a beneficiary of high commodity prices. It is also active in the power sector.

High oil and metals prices fuel a renewed search for more sources and also make marginal projects economical.

The company is next scheduled to update the market on May 4, with analysts keenly eyeing any new orders.

Weir shares are trading on a December 2010 earnings multiple of 15.7 times, falling to 14.3 next year.

This is a lower rating than when Questor last gave an update in November, and the shares are about 250p higher.

This is an indication of how much analysts have been increasing their forecasts recently.

Indeed, Credit Suisse upgraded its rating on the shares to “outperform” from “neutral” a few weeks ago.

The shares are up 62pc since they were recommended on June 17 last year at £11.02, compared with a FTSE 100 up 15pc. Buy.