EQUITY RESEARCH

INITIATING COVERAGE

THE WEIR GROUP PLC (LSE:WEIR.LN)

Energy: Oilfield Services

October 22, 2012

Fracturing Equipment Weakness a

Near-Term Risk; Initiating at Sell

Doug Garber,Vice President

dgarber@drco.com 212.372.5714
James Crandell,Managing Director
jcrandell@drco.com 212.702.4515
Jonathan Hunter,Associate
jhunter@drco.com 212.372.5715
Recommendation
Rating:
Price Target (in ):
Expected Return:
Dividend:
Enterprise Value (MM):
Yield:
Expected Total Return:

Sell
1,500.00p
(16.5)%
37.56p
4,663.5
2.09%
(14.4)%

Earnings Per Share

1Half
2Half
FY
P/E

2011A
59.60p
72.70p
132.20p
13.6x

2012E
76.20pA
71.40p
147.10p
12.2x

2013E
64.90p
70.50p
135.40p
13.3x

We are initiating coverage on WEIR.LN with a Sell rating and

1,500p price target. We believe the weakness in fracturing
equipment new orders and aftermarket demand are a risk to
near-term earnings that is not likely to be offset by continued
earnings growth in the Minerals segment.
Near-Term Risk to Oil & Gas from Weak Fracturing Aftermarket Demand
We believe the companys heavy exposure to the North American fracturing space puts
earnings at risk. New orders for fracturing equipment are expected to be down over 50% in
2H12 vs 1H12, according to our analysis, and even lower in 2013. Aftermarket fracturing
demand is also being adversely impacted due to weak fracturing service company profitability

Stock Statistics as of 10/19/2012 (in )

(negative for some) that is causing customers to reduce repair and maintenance (R&M)

Price:
52W Range:
Market Cap (MM):

We believe there is risk to 2H12 guidance due to a US rig count that has been heading lower

1,797.00p
2,243.00p-1,352.00p
3,818.9

Fundamentals
EBITDA ('11A)
EBITDA ('12E)
EBITDA ('13E)
EV/EBITDA ('11)
EV/EBITDA ('12)
EV/EBITDA ('13)

473
567
539
9.9x
8.2x
8.7x

expenses and use parts from parked equipment (at least 10% according to our analysis).
and a disappointing rebound in Canadian activity following the 2Q spring break-up versus
guidance that is based on a flattish rig count in 2H12.

Growth in Minerals Profitability Helps Offset Some Oil & Gas Weakness
We expect the companys Minerals business to continue to grow profitability and help offset
some of the decrease from the Oil & Gas segment. The Minerals segment is being driven by
a larger installed base, a higher aftermarket mix, and increased production of most minerals.
While the company has heavier exposure to the more intense mining processes for gold
and copper, the company does have exposure to iron ore and coal, where the growth rate of
production is slowing due to lower commodity prices and capex reductions.

Initiating with a Sell due to Near-Term Fracturing Weakness

While we believe Weir is well positioned for longer-term growth, with exposure to high-growth
end markets in the Minerals and Oil & Gas economy, we see near-term earnings risk due to
overcapacity in the North American fracturing market. We expect earnings to be lower in 2013
than 2012.
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Thesis/Executive Summary

EQUITY RESEARCH
Near-Term Risk from Oil & Gas Segment due to Fracturing Aftermarket
Weakness
We believe there is near-term risk to WEIR.LN due to the companys exposure to the North
American Oil & Gas fracturing market. We believe a declining US rig count in 3Q (-4% q/
q) and weakness in Canada (-26% y/y) puts the companys guidance at risk, since it was
based on a flattish rig count in 2H. In addition to the lower rig count decreasing aftermarket
demand, we expect near-breakeven fracturing pricing and excess inventory to further reduce
the demand for aftermarket parts as frac providers look to improve margins by taking parts
from parked equipment. We are modeling 2012E operating profit of 439MM, below guidance
of 440-460MM.

Oil & Gas Exposure Is Significant and Likely Peaked in 1H12

The companys strongest growth engine over the past few years has been North American Oil
& Gas; this segment comprised 25% of 1H12 orders and represented 36% of the incremental
input growth since 1H10 the largest of any category. Oil & Gas operating profit represented
48% of profit in 1H12 (having the largest contribution for the first time). We expect the profit in
this segment to decrease by over 40% by 1H13, causing the Oil & Gas segment to represent
just 31% of operating profit in 1H13.

Minerals Outlook Provides Some Growth to Offset Oil & Gas Weakness
The outlook for the Minerals segment is more positive than the Oil & Gas segment and
should help offset some of the deterioration from decreased fracturing activity. Increased
Minerals profitability should be driven by: 1) A higher aftermarket (AM) contribution that
has roughly 3x the profitability as original equipment (OE) orders. 2) Growing production
for commodities such as iron ore, coal, gold, copper, aluminum, and oil sands mining. The
outlook has moderated a bit recently due to lower capex budgets for some major projects
in Australias iron ore and coal regions, but the companys earnings are driven more by the
production process than by expansion capex. Furthermore, the company has more exposure
to the more intense gold and copper process than the iron ore and coal process. 3) Longerterm growth should be driven by declining ore grades across various commodities that should
require more intense processing.

Target Valuation Indicates Near-Term Downside to 1,475p

We are initiating on WEIR.LN with a Sell rating and a 1,500p target value based on 7.5x our
2013 expected EBITDA of 539MM. We expect the Oil & Gas segment to weigh on earnings
over the next year. Our target multiple of 7.5x is a bit above the peer range of 7.2x due to the
high aftermarket portion in WEIRs earnings mix and below its historical average NTM EV/
EBITDA of 9.0x due to the risk to earnings and the increased cyclicality in the more prevalent
Oil & Gas segment.

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Company Description & Outlook
Summary

EQUITY RESEARCH
Weir is a manufacturing company focused on high growth end markets in the natural resource
economy. The company produces pumps, valves, cyclones, and screens, among other
products. The company focuses on growing its installed base in both Minerals and Oil &
Gas and then servicing the original equipment with aftermarket parts and services that are
generally higher margin, steadier businesses.
The Minerals segment and Oil & Gas business comprise most of the earnings, with the Power
& Industrial segment rounding out the rest of the earnings mix. Over the past few years, the
company benefited from a surge in demand for fracturing equipment, but a downturn in gas
drilling is causing a meaningful slowdown that we expect to weigh on earnings for the next
year. The company also recently expanded its Oil & Gas exposure through two acquisitions,
Seaboard and Novatech. Seaboards wellhead division should provide some stability to the
volatile fracturing equipment division, but that, too, is seeing a gradual slowdown with the rig
count. Longer term, the development of horizontal drilling and fracturing techniques should
provide solid growth for the Oil & Gas segment, where Weir is a leader.
The Minerals segment should see steadier growth, although moderated from some
softness in iron ore and coal growth rates. A growing installed base, with a high aftermarket
component and a balanced end market portfolio, should lead to steady increases in
profitability in the Minerals segment. Longer term, deteriorating ore grades should be a
positive trend for Weirs Minerals segment.

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Oil & Gas Upstream Outlook a NearTerm Concern

EQUITY RESEARCH

We expect OE fracturing sales to decrease meaningfully (over 50%) in 2H12 and to be

even lower in 2013; cement pump OE demand should decrease, as well. SPM and Mesa
represented roughly two-thirds of 1H12 revenue, and they could see a decrease of 40%-50%
in 2H12 due to lower OE and AM demand. Wellhead (Seaboard) activity will not be as volatile
as the OE frac demand, but we do expect a decrease in line with overall North American
rig activity. Flow control activity should decrease, as well, due to less demand from new
units (roughly 50% of demand, according to our estimates) and less wear in the aftermarket
from less intense gas activity and less R&M spending. Pump aftermarket activity should
slow, too, even though it is a consumable, as fracturing companies reduce R&M due to low
margins (negative for some) and use parts from parked equipment (at least 10%), instead
of purchasing new AM units. There has also been price pressure (5-10%) in the fluid end
market due to increased competition that is expected to negatively impact this segment. Weir
SPM is the leader in fracturing equipment, and we would expect the company to gain back
some market share as its capacity becomes available and companies switch back to Tier One
providers. The smaller downstream Oil & Gas segment has a positive outlook and should
marginally offset some of the weakness in the upstream segment.
Upstream Product Line Split by Revenue
Frac Pump OE

Wellhead

Cement Pump OE

Flow Control

Pump Aftermarket

Source: DRCO Research estimates & Weir 2012 interim report presentation

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EQUITY RESEARCH

New Fracturing Deliveries to Fall

Meaningfully (50%+ Decrease) in 2H12

We see a weak fracturing newbuild market through at least mid-2013. The US market added
roughly 1 million HP each quarter from 1Q11 through 2Q12. We expect this rate to slow to
roughly 400,000 HP per quarter, on average, in 2H12. In 2013, we do not expect significant
original equipment demand. We believe aftermarket activity could pick up in the back of 2013
if natural gas directed activity rebounds and inventories are worked through.

US Frac HP Additions Slowing

1,200

Thosand Horsepower

1,000
800
600
400
200
0
2011 Qtrly Add Rate

1H12 Qtrly Add Rate

2H12 Qtrly Add Rate

Source: DRCO Research, Individual Company Filings, Spears & Associates

US Frac HP by Company
HP in thousands

HAL

SLB

BHI

US Well

Mission

1,815
2,480
2,830
2,980

1,385
1,740
1,928
2,003

1,175
1,440
1,628
1,703

500
750
750
750

996
1,620
1,620
1,620
10%

375
733
765
818

354
550
690
690

280
430
500
600

58
178
242
306

202
364
441
493

348
515
620
670
4%

413
600
683
683

142
192
192
192

108
122
122

20
30
90
90

20
20

66

18
18

48
225
300
300

30
162
315

120
168
168

na
175
193
193

120
120

114
114
114

385
500
550
600

8,496
12,893
14,743
15,631

665
350
100

355
188

265
188
75
263

196
140
-

120
64
64

162
77
52

50
-

108
14
-

10
60
-

20

66

18
-

177
75
-

30
132
153

120
48
-

na
18
na

120
na

114
na
na

115
50
-

128

129

50
155

187
83
-

140

150
70
30
70
170

167
105

75
263

623
-

358
32

500

250
na
na
na
na

83

14

60

20

66

18

75

285

48

18

120

na

50

4,222
1,831
485
323
2,688

Growth Rate
2011 Growth
2Q12 Growth vs 2011 YE
Remaining 2012 Operated Growth vs 2Q12 End
Remaining 2012 Total Growth vs 2Q12 End
2012 Growth

37%
14%
4%
5%
20%

26%
11%
0%
4%
15%

23%
13%
0%
5%
18%

50%
na
na
na
na

63%
0%
0%
0%
0%

95%
4%
0%
7%
12%

55%
25%
0%
0%
25%

53%
16%
6%
20%
40%

207%
36%
26%
26%
72%

80%
21%
12%
12%
35%

48%
20%
0%
8%
30%

45%
14%
0%
0%
14%

35%
0%
0%
0%
0%

na
13%
0%
0%
13%

50%
200%
0%
0%
200%

na
na
100%
na
na

na
nm
nm
nm
nm

na
nm
0%
0%
na

369%
33%
0%
0%
33%

na
440%
95%
95%
950%

NA
40%
0%
0%
40%

na
na
nm
0%
10%

na
nm
nm
0%
na

na
0%
nm
0%
na

30%
10%
0%
9%
20%

51.8%
14.4%
3.3%
6.0%
21.2%

Idle Equipment, estimates

Excess From Smaller Oil Fleets/Rotational/Back-up
New Equipment Parked
Existing Equipment Idled/Retired
Total Idle Equipment
% Idle of YE 2012

80

70
75
50
195
10%

50
105
50
205
12%

20

150
230
8%

147

53
136
189
23%

110

70
73
143
24%

0%

70
35
105
16%

0%

40
40
33%

0%

25
25
50
8%

295
655
559
1,509
9.7%

Period End Estimated Capacity

End 2010, YE
End 2011, YE
2Q12 End
End 2012E, YE
Capacity Additions, estimates
2011 Adds
1H12 Adds
2012 Remaing Adds- Operated
2012 Remaing Adds - Parked
2012 Adds

WFT

20
3%

FTS

147
9%

NBR

53
85

PTEN

SPN

110
16%

CJES

0%

CFW-T

TCW-T

RES

BAS

ARCHER

GFS

TPLM

SWN

OAS

PXD

COS

27
27
4%

Co. X

Sanjel

48
0%

0%

0%

0%

0%

0%

0%

0%

48
29%

Other

Total

Source: DRCO Research, Individual Company Filings, Spears & Associates

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EQUITY RESEARCH

Upstream Capex Is Decreasing 2013

Expected to Be Half of Peak Levels

We estimate capex for upstream service companies that focus on fracturing should decrease
by 25% year-over-year and 20% sequentially in 2H12. We expect 2013 levels to be roughly
half of peak levels as companies limit capex to maintenance levels. We see downside to
these estimates given weak profitability levels. We do note that fluid ends can be expensed
as operating items are not capitalized depending on the accounting treatment.

Capex For Select Fracturing-Focused Energy Service Companies

Capital Expenditures, $ in millions
C&J Consolidated
Calfrac Consolidated
Trican Consolidated
RPC Consolidated
Basic Consolidated
Total Companies with Forward Forecast
Patterson Pressure Pumping
Canyon Consolidated
Total

1Q10
3
15
74
10
11
113
9
20
143

2Q10
5
22
43
46
14
131
11
20
162

3Q10
12
30
80
49
18
189
16
15
220

4Q10
26
47
81
81
20
255
15
26
295

1Q11
30
65
100
92
72
360
41
23
424

2Q11
35
70
161
111
42
420
41
29
491

3Q11
41
85
148
102
52
428
53
29
510

4Q11
34
101
163
111
55
463
63
21
547

1Q12
39
84
156
121
47
447
55
35
537

2Q12
39
75
148
83
40
385
58
21
463

3Q12E
45
65
113
75
40
337

4Q12E
45
60
113
75
40
332

1Q13E
40
75
20
55
40
230

2Q13E
40
50
25
55
40
210

3Q13E
40
50
25
55
40
210

4Q13E
40
50
25
55
40
210

Sequential % Change
C&J Consolidated
Calfrac Consolidated
Trican Consolidated
RPC Consolidated
Basic Consolidated
Total Companies with Forward Forecast
Patterson Pressure Pumping
Canyon Consolidated
Total

1Q10

2Q10
81%
50%
-42%
348%
30%
16%
21%
-3%
14%

3Q10
154%
36%
85%
6%
25%
44%
36%
-23%
36%

4Q10
123%
57%
0%
65%
11%
35%
-5%
71%
34%

1Q11
15%
39%
24%
13%
263%
41%
180%
-11%
44%

2Q11
19%
7%
61%
21%
-41%
17%
1%
26%
16%

3Q11
17%
21%
-8%
-9%
23%
2%
27%
-1%
4%

4Q11
-17%
19%
10%
9%
5%
8%
19%
-27%
7%

1Q12
13%
-17%
-4%
10%
-14%
-3%
-13%
67%
-2%

2Q12
1%
-11%
-5%
-32%
-15%
-14%
5%
-41%
-14%

3Q12E
15%
-14%
-24%
-10%
0%
-13%

4Q12E
0%
-8%
0%
0%
0%
-1%

1Q13E
-11%
25%
-82%
-26%
0%
-31%

2Q13E
0%
-33%
25%
0%
0%
-9%

3Q13E
0%
0%
0%
0%
0%
0%

4Q13E
0%
0%
0%
0%
0%
0%

Annual % Change
C&J Consolidated
Calfrac Consolidated
Trican Consolidated
RPC Consolidated
Basic Consolidated
Total Companies with Forward Forecast
Patterson Pressure Pumping
Canyon Consolidated
Total

1Q10

2Q10

3Q10

4Q10

1Q11
1084%
342%
35%
790%
553%
218%
337%
14%
197%

2Q11
676%
216%
270%
140%
193%
220%
264%
48%
203%

3Q11
257%
182%
84%
107%
189%
126%
240%
90%
132%

4Q11
33%
115%
102%
36%
174%
82%
325%
-19%
85%

1Q12
30%
29%
55%
32%
-35%
24%
33%
51%
26%

2Q12
11%
8%
-8%
-26%
-6%
-8%
39%
-29%
-6%

3Q12E
9%
-23%
-24%
-27%
-23%
-21%

4Q12E
31%
-40%
-31%
-33%
-27%
-28%

1Q13E
3%
-11%
-87%
-55%
-15%
-49%

2Q13E
2%
-33%
-83%
-34%
0%
-45%

3Q13E
-11%
-23%
-78%
-26%
0%
-38%

4Q13E
-11%
-17%
-78%
-26%
0%
-37%

Source: DRCO Research and Individual Company Filings

Capex for Select US Fracturing Focused Companies

500
450
400
Capex $inmillions

350
300
250
200
150
100
50
0
4Q13E

3Q13E

2Q13E

RPC Consolidated

1Q13E

4Q12E

3Q12E

Trican Consolidated

2Q12

1Q12

4Q11

Calfrac Consolidated

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

C&J Consolidated

Basic Consolidated

Source: DRCO Research and Individual Company Filings

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Aftermarket Orders Should Slow,

Too, due to Low Margins and Excess
Equipment

EQUITY RESEARCH

We expect the surplus capacity and weak profit margins to reduce aftermarket orders,
too. Given near-breakeven frac margins in numerous basins in the leading-edge spot
market, we expect frac operators to take spares from existing equipment or rotate into
parked equipment, instead of ordering replacement parts. We estimate that at least roughly
10% of the equipment in the US should be parked by yearend. We further estimate that
underutilized equipment (i.e., spread working 50% of the days in the month) should require
fewer aftermarket parts.

Examples of Low Fracturing Pricing

There have been reports of fracturing pricing near breakeven levels in some basins. There
are even two fracturing companies that have negative margins across their US fracturing
operations. Eagle Ford pricing has been reported to be as low as $120,000/stage currently,
down from 2011's peak contract work of $220,000/stage for one operator. We view the
$220,000/stage as an exceptionally high price that probably represented the peak of the
market for a small operator with limited options. With 5% cost-per-stage inflation due to guar,
we estimate the current margins for some are around 12.5% for leading-edge work. We have
estimated a more normalized 2011 price was around $175,000/stage, which generated a 43%
gross margin. We note job design and cost structures can vary significantly in the Eagle Ford
depending on proppant and gel selection and the location of the service company's base.
Efficiency can also significantly impact margins.
In the Marcellus, we also estimate current gross margins could be as low as 12.5%, based
on a current contract price of $80,000/stage and a cost of $70,000/stage for a slickwater job
design. This is considerably lower than pricing in late 2011 of $115,000/stage that generated
a gross margin of 39%. This is also much lower than estimated 2011 contract pricing of
around $130,000/stage (46% gross margin) and much lower-than-peak spot pricing of
$180,000/stage (61% gross margin).
Frac Pricing Illustrative Examples in the Eagle Ford and Marcellus
Eagle Ford Frac Price, Inflation
and Margin Sensitivity
Revenue per stage
Cash cost per stage
Profit per stage
Gross Margin

Peak 2011 Contract

220,000
100,000
120,000
54.5%

3Q11
175,000
100,000
75,000
42.9%

Current
120,000
105,000
15,000
12.5%

Marcellus Frac Price and Margin

Sensitivity
Revenue per stage
Cash cost per stage
Profit per stage
Gross Margin

Peak 2011 Spot

180,000
70,000
110,000
61.1%

Peak 2011 Contract

130,000
70,000
60,000
46.2%

4Q11
115,000
70,000
45,000
39.1%

Current
80,000
70,000
10,000
12.5%

Source: DRCO Research

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EQUITY RESEARCH

Margins Negative for Some and Declining for Others Lower R&M (AM)
Expected
Due to price weakness, lower utilization, and guar inflation, frac companies have been
suffering deteriorating margins. FTS International (10% HP market share) had a -2% EBIT
margin in 2Q, and the company's exit rate was lower than the average for the quarter.
Tricans US (4% market share by HP) division had an EBITDA margin of -11% in 2Q12.
Others had healthy margins, but should see deterioration, as leading-edge frac pricing has
been decreasing. We expect companies to have minimal OE orders and to reduce repair and
maintenance (R&M) activity as they use parts from parked equipment in order to preserve
margins during a downturn.

Margins for Companies Levered to Fracturing

Gross Margin
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12E
4Q12E
1Q13E
C&J Consolidated
36.7%
47.4%
46.7%
40.1%
47.8%
42.5%
42.3%
46.7%
42.9%
41.2%
39.2%
36.6%
35.8%
RPC Consolidated
39.2%
44.8%
46.2%
46.8%
47.3%
45.2%
44.3%
44.4%
45.5%
43.8%
42.1%
40.4%
37.7%
Patterson Pressure Pumping
27.2%
29.3%
36.7%
34.3%
34.0%
35.6%
33.6%
31.7%
31.0%
33.0%
Basic Completion and Remedial Services
34.3%
38.8%
41.4%
43.2%
43.7%
43.5%
46.2%
44.6%
41.0%
40.5%
38.5%
38.0%
38.0%
FTS Consolidated
34.8%
52.1%
50.8%
53.8%
49.6%
49.6%
47.2%
40.4%
32.8%
19.5%
Calfrac US
10.7%
27.6%
29.0%
28.8%
32.4%
36.7%
30.3%
32.2%
25.2%
21.9%
17.0%
15.0%
16.0%
Trican US
17.4%
19.8%
23.9%
22.0%
28.9%
31.2%
27.5%
23.7%
11.3%
-8.8%
-8.0%
-3.0%
5.0%
US Average
28.6%
37.1%
39.3%
38.4%
40.5%
40.6%
38.8%
37.7%
32.8%
27.3%
Calfrac Canada
32.7%
7.5%
35.7%
36.4%
36.1%
8.5%
39.8%
43.2%
36.1%
9.2%
28.5%
29.0%
30.0%
Trican Canada
33.8%
23.2%
39.0%
40.2%
39.5%
22.5%
41.7%
40.9%
38.6%
2.9%
32.0%
28.0%
28.5%
Canyon Canada
37.5%
9.7%
51.3%
51.2%
47.1%
1.2%
44.7%
44.8%
40.8%
5.9%
Canada Average
34.7%
13.5%
42.0%
42.6%
40.9%
10.7%
42.1%
43.0%
38.5%
6.0%
* Represents the gross margin (excluding D&A unless noted) for the company's consolidated results for the resepective region. Data generally includes some services other than pressure pumping.

2Q13E
36.4%
38.4%

3Q13E
37.2%
39.4%

4Q13E
38.0%
40.4%

38.0%

38.0%

38.5%

17.5%
8.0%

18.5%
10.0%

19.5%
11.0%

8.5%
4.0%

29.0%
28.0%

29.5%
29.0%

EBITDA Margin
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12E
Calfrac US
7.3%
24.3%
25.6%
25.0%
29.1%
34.5%
28.0%
29.8%
22.6%
18.8%
14.6%
Trican US
15.6%
18.2%
21.7%
20.2%
27.4%
28.9%
26.3%
21.9%
9.9%
-10.7%
-9.3%
C&J Stimulation+Well Intervention
44.4%
39.7%
40.0%
44.9%
40.4%
38.1%
35.3%
RPC Consolidated
26.1%
33.2%
35.3%
37.3%
37.8%
37.0%
36.9%
35.7%
36.6%
35.1%
32.9%
Patterson Pressure Pumping
22.5%
24.6%
33.5%
31.4%
31.6%
33.4%
31.6%
29.9%
29.2%
30.9%
FTS Consolidated
25.3%
40.4%
44.9%
40.2%
40.1%
37.8%
39.3%
29.5%
22.2%
8.3%
US Average
19.4%
28.1%
32.2%
30.8%
35.1%
35.2%
33.7%
32.0%
26.8%
20.1%
Calfrac Canada
29.5%
2.9%
33.3%
33.9%
34.0%
5.2%
37.9%
41.4%
34.2%
5.6%
26.4%
Trican Canada
31.5%
19.0%
36.2%
37.4%
37.3%
18.6%
39.6%
39.5%
36.7%
-0.8%
30.2%
Canada Average
30.5%
10.9%
34.7%
35.6%
35.6%
11.9%
38.7%
40.5%
35.5%
2.4%
28.3%
* Represents the EBITDA margin for the company's segment where Pressure Pumping is reported. Data generally includes some services other than pressure pumping.

4Q12E
12.3%
-4.1%
32.2%
30.7%

1Q13E
12.8%
3.8%
31.4%
27.7%

2Q13E
14.1%
6.9%
32.3%
28.3%

3Q13E
16.2%
.
33.6%
29.3%

4Q13E
17.1%
10.0%
34.7%
30.3%

27.0%
26.2%
26.6%

28.0%
26.5%
27.2%

4.7%
0.3%
2.5%

26.8%
26.5%
26.6%

27.4%
27.5%
27.5%

EBIT Margin
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
Halliburton NAM C&P
12.2%
21.6%
26.8%
27.0%
27.6%
32.0%
32.5%
29.9%
27.4%
21.8%
C&J Stimulation+Well Intervention
41.8%
37.2%
37.4%
41.8%
37.5%
34.7%
RPC Technical Services
13.0%
20.5%
24.3%
27.3%
28.6%
26.9%
27.6%
25.7%
26.8%
24.3%
Patterson Pressure Pumping
8.3%
11.3%
21.7%
21.4%
23.0%
25.2%
22.4%
21.3%
19.4%
17.9%
Nabors Pressure Pumping
19.5%
21.1%
17.0%
16.5%
18.9%
20.7%
16.8%
12.3%
FTS Consolidated
8.9%
31.5%
37.3%
32.1%
32.5%
31.0%
31.7%
22.7%
13.3%
-1.6%
US Average
10.6%
21.2%
25.9%
25.8%
28.4%
28.1%
28.4%
27.0%
23.5%
18.3%
* Represents the EBIT margin for the company's segment where Pressure Pumping is reported. Data generally includes some services other than pressure pumping.

4Q12E
16.8%
28.0%
18.5%

1Q13E
17.7%
27.0%
15.0%

2Q13E
17.8%
27.5%
15.5%

3Q13E
18.8%
29.0%
16.5%

4Q13E
19.6%
30.0%
17.5%

3Q12A/E
14.2%
31.5%
21.5%

Source: DRCO Research & Individual Company Filings

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DAHLMAN ROSE & CO.

Minerals Outlook More Stable

EQUITY RESEARCH

The outlook for the Minerals segment is more positive than that for the Oil & Gas segment,
which should help offset some of the deterioration from decreased fracturing activity.
Increased minerals profitability should be driven by: 1) A higher aftermarket (AM) contribution
that has roughly 3x the profitability as original equipment orders (OE). 2) Growing production
for commodities, such as iron ore, coal, gold, copper, aluminum, and oil sands mining. The
outlook has moderated a bit recently due to lower capex budgets for some major projects
in Australias iron ore and coal regions, but the companys earnings are driven more by the
production process than by expansion capex. Furthermore, the company has more exposure
to the more intense gold and copper mining process than the iron ore and coal process. 3)
Longer-term growth should be driven by declining ore grades across various commodities
that should require more intense processes.
The end markets for the Minerals segment are roughly 20% iron ore and coal (that require
less intense mining procedures), 50% copper and gold (that require intense processing), and
approximately 30% nickel, aluminum, and other, according to the company. The outlook for
iron ore and coal is slowing due to low commodity prices, and we expect this to weigh on OE
volume growth for the next few halves.

Oil Sands a Highlight for Minerals

Segment

One of the strongest end markets for the Minerals division is the oil sands in North America.
North American Minerals input was the third-largest segment for the company, representing
11% of total orders and 22% of Minerals orders. We expect the outlook to be strong for the oil
sands over the next few years.
Oil Sands Capex
25,000

Capital Expenditures ($millions)

20,000

15,000

10,000

5,000

2015E

2014E

2013E

2012E

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: DRCO Research & Energy Resources Conservation Board (ERCB)

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DAHLMAN ROSE & CO.

Mining Company Capex Guidance
Lowered

EQUITY RESEARCH
The success and profitability of Weirs Mining segment relies on the capital spending and
maintenance capex plans of global mining companies. Among Weirs top seven customers
by revenue, five have stated plans to either cut capex or defer capex in 2012 and 2013 due
to the current weak exploration and development environment. As of 1H12, the Minerals
segment made up 47% of total operating profit, and we expect this to increase to roughly 60%
in 2013, as the Oil & Gas contribution to operating profit declines to roughly 30% from 48% in
1H12.
Customer Capital Spending Commentary
Customer

GDF Suez

Anglo American plc

BHP Billiton

Vale

Rio Tinto

Xstrata plc

Newmont Mining Corp

% Revenue
(Bloomberg
Estimate)

1H12 Capex Commentary

9.39%

--"CapEx stood at EUR4.7 billion at the end of H1 2012. For the full year we are adjusting our expectation to
EUR10 billion to EUR11 billion. This figure does not include, of course, the acquisition of the International
Power minorities. For 2013, given the wider economic backdrop, we plan to adjust our CapEx program to the
lower end of the range of the EUR9 billion-EUR11 billion range."
--"Given the current environment, we anticipate that our growth CapEx will be down from EUR10 billion-EUR11
billion this year to the lower end of EUR9 billion-EUR11 billion next year."

7.39%

--"Turning to CapEx and net debt; CapEx of $2.3 billion in the first half. For the full year, we are projecting $5.5
billion. That's down $1.5 billion, compared to our guidance at the beginning of the year.In addition, we are
deferring $200 million in exploration and early study development expenses in 2012."
--"For 2013, we have set a CapEx funding target of $6 billion. And the 2013 funding target for exploration in early
studies will be $600 million, down a further $300 million on 2012. Investment will be directed to the most value
accretive and lowest risk options."

BHP AU Equity

5.50%

--"And so things change going forward. We're going to -- if they -- if our forwarded five-year outlook and beyond
is lower, we're going to spend less CapEx. If the five-year and above view is higher, we're going to spend more
CapEx. Within the confines that we can't accelerate easily."
--"Probably five-year CapEx forecasts on average -- the cash -- raw cash generated by the assets have probably
come down a little bit. Just forward projections. And so what we are trying to do is we're just trying to steer that
overall high grading of CapEx."

VALE5 BZ Equity

2.58%

--"And about the CapEx. I think that we must provide a review based in the cash flow. I think that it's very
important to say that we intended to finalize all the projects. We don't want to review the cap (inaudible)."

2.37%

--"Our capital expenditure forecast for 2012 remains at $16b. As the slide shows, CapEx on approved and
sustaining projects will taper off from this level in 2013. New project approvals such as Phase II at Oyu Tolgoi,
Simandou, and South of the Embley may lead to capital expenditure in 2013 at a similar level to 2012. But this
will depend on market conditions and the timing of approvals."

2.34%

--"Following the review of our project spending, as Trevor has highlighted, we have re-sequenced capital spending
and deferred $1 billion of expenditure currently or originally planned for 2012. Consequently, our 2013 budgeted
spending will increase by $400 million with $600 million deferred well beyond that point. Now importantly, this
re-sequencing will not affect the commissioning schedule of any of our approved projects, and no projects have,
therefore, been cancelled. We now expect our expansionary capital expenditure in 2012 to reduce to $7.2 billion,
$1 billion less than our previous guidance, smoothing the profile of capital spending across the next two years."

2.16%

--"And with respect to lumpy capital spending, we've been, I think, clear that 2012 and 2013 on the old Conga plan
were the years where we would have the predominance of capital spending with respect to our 6 million to 7
million ounce delivery in 2017, with capital killing off beginning in 2015."
--"So there are two lumpy years -- sorry, 2014 -- 2012 and 2013. We still believe that, although with Conga
deferred, we are now actually generating $300 million of additional cash flow this year less -- after tax."
--"In support of this effort for 2012 and 2013 we have, as we have communicated previously, revised our estimates
for capital spending at Conga to $440 million on an attributable basis. Thus far in 2012 Newmont has spent
approximately $185 million in development of water reservoirs, engineering, equipment, and camp construction.
However, I must continue to caution that ongoing community unrest and protests could further delay advancement
of those activities."

Ticker

GSZ FP Equity

AAL LN Equity

RIO LN Equity

XTA LN Equity

NEM US Equity

Source: DRCO Research, Bloomberg, Individual Company Commentary

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DAHLMAN ROSE & CO.

Valuation A Below-Average Multiple

with Heavier Cyclical Oil & Gas
Exposure

EQUITY RESEARCH

Target Valuation
We are initiating on WEIR.LN with a Sell rating and a 1,500p target value, based on 7.5x our
2013 expected EBITDA of 539MM. We expect the Oil & Gas segment to weigh on earnings
over the next year. Our target multiple of 7.5x is a bit above the peer range of 7.4x due to the
high aftermarket portion in WEIRs earnings mix and below its historical average NTM EV/
EBITDA of 9.0x due to the risk to earnings and the increased cyclicality in the more prevalent
Oil & Gas segment.
WEIR.LN stock is currently trading at a 13.4x NTM P/E multiple, below its median and
average of 14.7x and 14.1x, respectively. The recent acquisitions make the company more
cyclical. The outlook for Oil & Gas and, to a lesser extent Minerals, provides for a declining
earnings environment, and thus we believe a below-average/median multiple is appropriate
currently.

Historical NTM P/E

25.0x

NTM P/E Ratio

20.0x
Median

15.0x
10.0x
5.0x
0.0x

Jul-12

Mar-12

Nov-11

Jul-11

Mar-11

Nov-10

Jul-10

Mar-10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Source: DRCO Research & Bloomberg

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DAHLMAN ROSE & CO.

EQUITY RESEARCH

WEIR.LN stock is trading on a NTM EV/EBITDA multiple of 8.8x, below its median and
average of 9.3x and 9.0x, respectively.
Historical NTM EV/EBITDA
14.0x

NTM EV/EBITDA Ratio

12.0x
10.0x

Median

8.0x
6.0x
4.0x
2.0x
0.0x
Jul-12

Mar-12

Nov-11

Jul-11

Mar-11

Nov-10

Jul-10

Mar-10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Source: DRCO Research and Bloomberg

Comparables Multiple Analysis

Our peer analysis indicates WEIR.LN is more expensive than peers on both a P/E and EV/
EBITDA basis. The stock is currently trading at 13.4x 2013 earnings, above the peer average
of 11.8x. On 2013 EBITDA of 539MM, the stock is trading at 8.7x, ahead of peers at 7.4x.
Peer Comparables
Company Name
Cameron International**
National Oilwell Varco**
Forum Energy Technologies**
Dresser Rand*
Gardner Denver*
Joy Global*
Xylem Inc*
Flowserve Corporation*
Weir Group

Ticker
CAM
NOV
FET
DRC
GDI
JOY
XYL
FLS
WEIR-LN

LAST
Price
$56.05
$82.03
$23.08
$55.92
$58.50
$62.94
$24.65
$134.58
1,807.87

EPS
Rating
BUY
BUY
BUY
NR
NR
NR
NR
NR
SELL

2012E
$3.25
$6.05
$1.93
$2.66
$5.39
$7.10
$1.76
$8.50
147.08

Company Name
Ticker
Mkt. Cap
EV
Cameron International**
CAM
13,884
14,673
National Oilwell Varco**
NOV
35,027
32,110
Forum Energy Technologies** FET
1,978
2,330
Dresser Rand*
DRC
4,233
5,206
Gardner Denver*
GDI
2,867
3,141
Joy Global*
JOY
6,665
7,832
Xylem Inc*
XYL
4,575
5,423
Flowserve Corporation*
FLS
7,685
8,306
Average
Weir Group
WEIR-LN
3,844
*Not Covered, Bloomberg Estimates. ** Covered by James Crandell

2012E
17.3x
13.6x
12.0x
21.0x
10.9x
8.9x
14.0x
15.8x
14.2x
12.3x

2013E
$4.50
$7.65
$2.12
$3.90
$5.35
$6.77
$1.95
$10.38
135.41

CFPS
2012E
2013E
$4.24
$5.61
$7.54
$9.46
NM
NM
$2.91
$4.64
NM
NM
$7.54
$8.29
NM
NM
$10.95
$14.66
145.80
168.76

EBITDA
2012E
2013E
$1,362
$1,782
$4,411
$5,509
$321
$368
$465
$616
$445
$440
$1,332
$1,275
$642
$690
$779
$871
567
539

P/CF

EV/EBITDA
2012E
2013E
10.8x
8.2x
7.3x
5.8x
7.3x
6.3x
11.2x
8.4x
7.1x
7.1x
5.9x
6.1x
8.5x
7.9x
10.7x
9.5x
8.6x
7.4x
8.3x
8.7x

P/E
2013E
12.4x
10.7x
10.9x
14.3x
10.9x
9.3x
12.6x
13.0x
11.8x
13.4x

2012E
13.2x
10.9x
NM
19.2x
NM
8.3x
NM
12.3x
12.8x
12.4x

2013E
10.0x
8.7x
NM
12.1x
NM
7.6x
NM
9.2x
9.5x
10.7x

Source: DRCO Research & Bloomberg

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DAHLMAN ROSE & CO.

Oil & Gas Has Been the Main Driver of

Incremental Profit

EQUITY RESEARCH

Weirs operating profit mix has shifted significantly since 1H10. Oil & Gas was the largest
contributor in 1H12 for the first time. As of 1H12, Minerals now make up 47% of total
operating profit, down from 56% in 1H10; whereas the Oil & Gas segment currently
comprises 48% of operating profit, up from 38% in 1H10. The Power & Industrials segment
currently makes up 5% of operating profit, down from 7% in 1H10. Given weaker pricing and
oversupply in the North American pressure pumping market, we expect the operating profit
mix to shift away from Oil & Gas, as pressure pumping and, to a lesser extent, wellhead
demand slow down in North America.
% Operating Profit by SegmentOil & Gas the Largest Segment in 1H12

% Operati ng Profit

70%

5%

8%

10%

90%
80%

4%

7%

100%

38%

34%

44%

56%

56%

1H10A

2H10A

7%

9%

44%

48%

52%

48%

47%

1H11A

2H11A

1H12A

10%

31%

35%

31%

60%
50%
40%
30%
20%

62%

59%

1H13E

2H13E

55%

10%
0%

Minerals

Oil & Gas

2H12E

Industrials & Pow er

Source: DRCO Research & Weir 2012 interim report presentation

Segment Operating ProfitOil & Gas Was The Main Driver

300
12

250

23

18

in mi ll i ons

200
150
100
50

8
10

16

58

55

85

91

100

1H10A

2H10A

1H11A

84

16

25

123

85

70

74

113

120

134

138

141

2H11A

1H12A

2H12E

1H13E

2H13E

102

Minerals

Oil & Gas

Industrials & Pow er

Source: DRCO Research & Weir 2012 interim report presentation

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DAHLMAN ROSE & CO.

Geomarket Input Exposure North
American Oil & Gas Has Been the
Driver

EQUITY RESEARCH
The North American Oil & Gas Segment represents the largest area for inputs, at 25%. Since
1H10, the North American Oil & Gas segment has been responsible for 36% of the input
growth. As the fracturing market and, to a lesser extent, the wellhead market slow, we expect
the companys overall results to struggle to grow.
Geographic Input Breakdown
Inputs
in millions
Minerals Segment
North America
Australia
Europe/FSU
South America
Middle East/Africa
Asia Pacific

Change
1H10-1H12 % of Growth

1H10

2H10

1H11

2H11

1H12

% of Total
1H12

104
84
54
128
64
59

106
106
36
82
86
91

137
111
72
170
85
78

138
126
66
118
103
47

160
123
80
174
109
80

11%
8%
5%
11%
7%
5%

56
40
26
46
45
21

9%
6%
4%
7%
7%
3%

Oil & Gas Segment

North America Inputs
Europe/FSU Inputs
South America Inputs
Middle East/Africa Inputs
Asia Pacific Inputs

140
37
2
31
9

193
17
2
23
-4

263
26
0
33
3

338
34
8
35
12

374
49
5
44
15

25%
3%
0%
3%
1%

235
12
3
14
6

36%
2%
0%
2%
1%

Power & Industrial Segment

North America Inputs
Europe/FSU Inputs
South America Inputs
Middle East/Africa Inputs
Asia Pacific Inputs
Total Inputs

39
38
0
11
21
0
820

63
40
0
9
23
0
871

50
44
1
7
36
0
1117

53
59
2
8
43
0
1186

103
103
3
15
79
0
1516

7%
7%
0%
1%
5%
0%

54
46
0
6
46
2
657

8%
7%
0%
1%
7%
0%

Source: DRCO Research & Weir 2012 interim report presentation

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DAHLMAN ROSE & CO.

Revenue Breakdown

EQUITY RESEARCH

Aftermarket vs Original Equipment A Balanced Mix Provides Some Stability

The company has a strong aftermarket (AM) presence. We view this favorably, as it is a
higher-margin, more-consistent business than Original Equipment (OE) orders. We expect
OE revenue to decline due to headwinds in the upstream oil and gas market and a slowdown
in several mining end markets, notably iron ore and coal. As OE revenue decreases, we
expect margins in the Minerals division to expand, since AM has significantly higher margins
than OE. In Oil & Gas, the variance between OE and AM margins is not as pronounced as in
Minerals, and we expect margins to contract with overall throughput levels.
The breakout of revenue produced by original equipment versus aftermarket equipment has
remained relatively stable since 2010. The 1H12 revenue breakdown was 46% OE and 54%
Aftermarket (AM), versus 40% OE and 60% AM in 1H10.
% RevenueOriginal Equipment vs. Aftermarket
100%
90%
80%

40%

41%

45%

48%

46%

42%

40%

39%

60%

59%

55%

52%

54%

58%

60%

61%

1H10A

2H10A

1H11A

2H11A

1H12A

2H12E

1H13E

2H13E

% Revenue

70%
60%
50%
40%
30%
20%
10%
0%

% Total Aftermarket

% Total OE

Source: DRCO Research & Weir 2012 interim report presentation

Consolidated Original Equipment vs. Aftermarket Revenue Breakdown

1400
1200

in milli ons

1000
800
600

535

503

499

646

712

751

756

790

2H11A

1H12A

2H12E

1H13E

2H13E

458
306

350

400
200

599

601

452

498

554

1H10A

2H10A

1H11A

Total Aftermarket

Total OE

Source: DRCO Research & Weir 2012 interim report presentation

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DAHLMAN ROSE & CO.

EQUITY RESEARCH
% Revenue by Segment
Weir breaks out revenue among three segments: Minerals, Oil & Gas, and Power & Industrial.
As of 1H12, 51% of Weirs revenue came from the Minerals segment; 38%, from the Oil &
Gas segment; and 12%, from the Power & Industrial segment. Over the last five quarters,
the revenue contribution from Minerals has decreased to 51% from 57%, while the Power
& Industrial revenue contribution has decreased to 12% from 14%. During the same period,
the contribution from the Oil & Gas segment has increased from 29% to 38%, as the boom
in fracturing has increased the need for fracturing equipment and as the company has
been acquisitive in the Oil and Gas space. Oil & Gas has higher operating margins, so the
contribution to profit is more significant than the revenue contribution indicates.
1H12 Operating Segment Revenue Breakdown
Industrial & Pow er
12%

Minerals
51%

Oil & Gas

38%

Source: DRCO Research & Weir 2012 interim report presentation

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DAHLMAN ROSE & CO.

Significant Acquisitions Growing the

Oil & Gas Platform Recently

EQUITY RESEARCH

Weir has done a good job growing the company, both organically and through acquisition,
while consistently generating healthy free cash. Most recently, the company has placed a
strong focus on expanding its Oil & Gas division to exploit the growth in horizontal drilling,
exhibited through its acquisitions of Novatech LLC and Seaboard Holdings Inc. for roughly
550MM combined. While we believe this segment has solid long-term fundamentals, we
believe the increased Oil & Gas exposure could be a risk is the near term.
February 2012 In February 2012, Weir acquired the pump valve and valve manufacturer,
Novatech LLC for 112 MM. The acquisition expanded the companys aftermarket frac pump
offering, while allowing it the ability to bundle fluid ends and other pumping tools.
December 2011 In December 2011, Weir acquired the North American-focused wellhead
solutions company Seaboard Holdings Inc. for 432.1MM. The acquisition broadens Weirs
O&G product offering exposure and gives the company room to grow its wellhead offering in
North America and internationally.
June 2011 In June 2011, Weir Group acquired 60% interest in a South Korean valves
business, previously run by HIM Tech Co Ltd, and subsequently named the business Weir
International. The company designs and manufactures control and choke valves for power
generation and oil & gas applications.
December 2010 In December 2010, the company acquired Ynfiniti Engineering Services
(YES), operating in Spain and Portugal, to gain exposure in the wind and solar markets.
November 2010 In November 2010, Weir acquired American Hydro: a manufacturer of
turbine components in order to penetrate new hydro power markets.
November 2010 In November 2010, the Weir Group entered into a joint venture with
Chinese Shengli Oilfield Highland Petroleum Equipment Co. Ltd to provide high-pressure well
service pumps and related flow control equipment to the developing oil and gas industry in
China. The company assembled and tested its first pumps at the end of 2011 to address the
domestic fracturing market in China, which is still in its early growth stages.
October 2010 In October 2010, Weir acquired BDK, an Indian valve manufacturer to
expand Weirs low-cost capabilities in its Power & Industrial segment.
September 2010 In September 2010, Weir acquired Linatex, based in Malaysia. It is the
global leader in natural rubber products for use in high-wear mine applications, which are
highly complementary to the companys existing Minerals portfolio.

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Business Segment Overview

EQUITY RESEARCH
Minerals
Weir is the global leader in slurry handling, dewatering services, and aftermarket support
serving markets in South America, Australia, Asia-Pacific, Africa, and North America. Weir
Minerals delivers and supports equipment, such as pumps, hydrocyclones, valves, screen
machines and screen media, and rubber and wear resistant linings. The performance of
this segment relies heavily on mining projects, notably in North America (22% of orders),
with heavy exposure to the Canadian oil sands, and in South America (24% of orders). The
segment is driven more by mineral processing than capital expenditure growth and has a
significant aftermarket contribution.
Weir Minerals accounted for 51% of revenue and 47% of operating profit in 1H12, with 61%
of revenue coming from Aftermarket (AM) sales. We expect the growing installed base to lead
to a growing aftermarket business. As the aftermarket business grows in presence, we expect
this to lead to margin expansion, since the AM business has significantly higher margins than
the OE business.

1H12 Minerals Geomarket Breakdown by Inputs; Revenue Breakdown by Type

Source: DRCO Research & Weir 2012 interim report presentation

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DAHLMAN ROSE & CO.

EQUITY RESEARCH

Oil & Gas

Weir Oil & Gas designs and manufactures pumps and ancillary equipment, mainly for the
upstream oil and gas market, and provides aftermarket service and support to North America,
the Middle East & Africa, Europe & FSU, Asia-Pacific, and South America. Weir Oil & Gas
specializes in manufacturing high-pressure well service pumps, flow control equipment,
and upstream rotating equipment, while the smaller downstream business is focused
on the design and manufacturing of centrifugal pumps used in the refining industry. The
recent acquisitions of Seaboard and Novatech expand Weirs upstream product offering to
include high-pressure wellhead equipment and aftermarket pressure pumping expendable
components, respectively.
Weir Oil & Gas accounted for 38% of revenue and 48% of operating profit in 1H12, with 49%
of Oil & Gas revenue coming from Aftermarket sales. We expect the Oil & Gas segment to
face further troubles as frac pump overcapacity leads to minimal Original Equipment orders
well into 2013. We do not expect to see any significant improvement in this market until
fracturing demand picks up and companies work off excess inventory. Some positive trends in
the downstream business could help weather some of the decline in upstream activity.
As of 1H12, the clear geographic leader in Oil & Gas inputs was North America (76%),
followed by Europe & FSU (10%) and the Middle East & Africa (9%). Oil & Gas sales are split
nearly evenly, at 49% Aftermarket and 51% Original Equipment.

1H12 Oil & Gas Geomarket Breakdown by Inputs; Revenue Breakdown by Type

Source: DRCO Research & Weir 2012 interim report presentation

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DAHLMAN ROSE & CO.

EQUITY RESEARCH

Power & Industrial

Weir Power & Industrial designs and manufactures pumps, valves, and turbines and provides
support services to nuclear, fossil-fired, and renewable power stations, as well as the
industrial market in North America, Europe/FSU, Asia-Pacific, Middle East/Africa, and South
America. Weir Power & Industrial specializes in providing services and products that improve
efficiency and reduce downtime. The company has a small market share and aims to grow
the market share in this segment over time.
In 1H12, Weir Power & Industrial made up 12% of total revenue and 5% of operating profit,
with 44% of revenue comprised of Aftermarket sales. We expect results from this segment
to gradually improve, mostly due to opportunities in emerging oil and gas markets, and as
nuclear activity improves after the Japanese disaster.
As of 1H12, Weirs Power & Industrial segment was mainly divided among North American
activity (35%), Europe & FSU (30%), and Asia-Pacific (30%). The Middle East & Africa and
Australia make up 4% and 1% of inputs, respectively. A majority of orders are for Original
Equipment (56%).

1H12 Power & Industrial Geomarket Breakdown by Inputs; Revenue Breakdown by Type

Source: DRCO Research & Weir 2012 interim report presentation

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Management

EQUITY RESEARCH

Keith Cochrane Chief Executive

Keith Cochrane started at Weir Group as finance director in July 2006, and was promoted to
his current position as Chief Executive in November 2009. Before Weir Group, Mr. Cochrane
served as Director of Group Finance for Scottish Power plc beginning in 2003. Mr. Cochrane
also worked for Arthur Andersen for a number of years and Stagecoach Group plc starting in
1993, where he was appointed Finance Director in 1996 and later Group Chief Executive in
2000.
Jon Stanton Finance Director
Jon Stanton joined Weir Group as Finance Director in April 2010. Mr. Stanton previously
worked for Ernst & Young starting in 1988 and was appointed partner in the companys
London office in 2001, mainly to undertake audit responsibilities for multinational clients.
Steve Noon Weir Oil & Gas Divisional Managing Director
Steve Noon has served as the companys Divisional Managing Director of Weir Oil & Gas
since March 2009, before which he was President of Weir SPM and Managing Director
of Upstream for the Oil & Gas division. Prior to joining Weir Group, Mr. Noon served as
president of Schefenacker Vision Systems, North America.
Dean Jenkins Weir Minerals Divisional Managing Director
Dean Jenkins has served as Divisional Managing Director of Weir Minerals since August
2012. Mr. Jenkins was previously Divisional Managing Director of Weir Power & Industrial,
before which he worked for Qantas Airlines and was Chief Executive of UGL Ltds rail
division.
Kevin Spencer Weir Power & Industrial Divisional Managing Director
Kevin Spencer has served as Divisional Managing Director of Weir Power & Industrial since
August 2012. Mr. Spencer has 17 years of experience in the mining industry, and before
joining Weir Group in 2005, he held a number of senior positions with Joy Global.

Ownership

There is no significant insider ownership in WEIR shares. The stocks largest shareholder is
Aberdeen Asset Management, which owns just 5.15% of WEIR shares. Geographically, 10 of
the top 25 holders are US-based.

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Company Specific Risks

EQUITY RESEARCH
Commodity Price Risk The company is exposed to volatility in commodity prices. A drop in
oil and natural gas prices could have an adverse impact on company profits.
Dependency Risk The company generates a large percentage of profits from Weir SPM, its
service pump business. The company is heavily exposed to any changes in demand in the
hydraulic fracturing market, and a downturn in demand and/or pricing could have a significant
impact on profits.
Labor Risk Weir Group is exposed to the cyclical oil and gas industry that has recently been
experiencing a labor shortage. The inability to employ and retain an ample amount of skilled
employees could have a significant impact on profits.
Foreign Risk Much of Weirs metal and energy demand and consumption is dependent on
development in China. If China growth slows, Weir could be significantly impacted financially.

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EQUITY RESEARCH

Weir Group Plc

Income Statement*
Total Revenue
Operating profit (loss)
Share results of joint ventures
Total Operating profit (loss)
Finance costs
Finance income
Other finance costs - retirement benefits
Income (loss) before income taxes
Provision (benefit) for income taxes
Operating net income (loss)
Non-controlling interest
Net Income Available to Shareholders
Intangible Amortisation
Other Nonrecurring items, net of tax
Reported net income
Average basic shares outstanding
Average diluted shares outstanding
Diluted EPS (pence)
Reported EPS

2010A
1,635.0
305.1
4.6
309.7
(14.9)
1.5
(1.6)
294.7
82.8
211.9
(0.4)
211.5
(18.2)
5.4
198.7
210.6
213.1
99.25
105.26

1H11A
1,030.6
184.0
1.9
185.9
(7.5)
0.5
(0.8)
178.1
51.1
127.0
(0.1)
126.9
(11.3)
3.2
118.8
211.0
213.0
59.58
55.77

2H11A
1,261.4
223.9
2.9
226.8
(11.9)
3.8
(0.5)
218.2
63.1
155.1
0.1
155.2
(11.8)
15.9
159.3
211.2
213.4
72.73
74.65

2011A
2,292.0
407.9
4.8
412.7
(19.4)
4.3
(1.3)
396.3
114.2
282.1
0.0
282.1
(23.1)
19.1
278.1
211.2
213.4
132.19
130.32

1H12A
1,324.7
244.6
2.9
247.5
(21.5)
0.9
(0.9)
226.0
65.0
161.0
0.9
161.9
(18.0)
1.0
144.9
212.0
212.6
76.15
68.16

2H12E
1,299.8
231.6
2.9
234.5
(21.5)
0.9
(1.0)
212.9
61.2
151.7
0.9
152.6
(19.1)
5.5
139.0
212.0
212.6
71.35
64.95

2012E
2,624.5
476.2
5.8
482.0
(43.0)
1.8
(1.9)
438.9
126.2
312.7
1.8
314.5
(37.1)
6.5
283.9
212.0
212.6
147.08
132.68

1H13E
1,271.6
213.1
2.9
216.0
(21.5)
0.9
(1.0)
194.4
56.4
138.1
0.9
139.0
(19.1)
5.5
125.4
212.0
212.6
64.94
58.56

2H13E
1,301.1
229.7
2.9
232.6
(21.5)
0.9
(1.0)
211.0
61.2
149.8
0.9
150.7
(19.1)
5.5
137.2
212.0
212.6
70.48
64.10

2013E
2,572.8
442.9
5.8
448.7
(43.0)
1.8
(2.0)
405.5
117.6
287.9
1.8
289.7
(38.2)
11.1
262.6
212.0
212.6
135.41
122.66

362.0
22.1%
18.9%
18.0%
28.1%
13.0%

214.9
20.9%
18.0%
17.3%
28.7%
12.3%

258.2
20.5%
18.0%
17.3%
28.9%
12.3%

473.1
20.6%
18.0%
17.3%
28.8%
12.3%

289.6
21.9%
18.7%
17.1%
28.8%
12.2%

277.5
21.4%
18.0%
16.4%
28.8%
11.7%

567.1
21.6%
18.4%
16.7%
28.8%
11.9%

260.9
20.5%
17.0%
15.3%
29.0%
10.9%

278.2
21.4%
17.9%
16.2%
29.0%
11.5%

539.1
21.0%
17.4%
15.8%
29.0%
11.2%

Revenue
Original Equipment Revnenue
Aftermarket Revenue
Minerals

356.0
558.0
914.0

209.0
335.0
544.0

290.0
371.0
661.0

499.0
706.0
1205.0

260.0
405.0
664.9

299.0
437.4
736.4

559.0
842.4
1401.3

293.0
459.3
752.3

278.4
482.2
760.6

571.4
941.5
1512.9

Original Equipment Revnenue

Aftermarket Revenue
Oil & Gas

190.0
259.0
449.0

170.0
159.0
329.0

220.0
202.0
422.0

390.0
361.0
751.0

253.0
239.0
492.3

139.2
222.3
361.4

392.2
461.3
853.7

111.3
206.7
318.0

116.9
212.9
329.8

228.2
419.6
647.8

Original Equipment Revnenue

Aftermarket Revenue
Power & Industrial

110.0
133.0
243.0

79.0
60.0
139.0

91.0
73.0
164.0

170.0
133.0
303.0

86.0
68.0
154.5

97.2
91.8
189.0

183.2
159.8
343.5

99.1
90.0
189.1

104.1
94.5
198.5

203.2
184.4
387.6

Total Operating Revenue

Group Companies Sales to External Customers
Reported Consolidated Revenue

1606.0
25.9
1635.0

1012.0
14.8
1030.6

1247.0
11.5
1254.7

2259.0
26.3
2285.3

1311.7
13.0
1324.7

1286.8
13.0
1299.8

2598.5
26.0
2624.5

1259.4
13.0
1271.6

1288.9
13.0
1301.1

2548.4
26.0
2572.8

Operating Profit
Minerals
Oil & Gas
Power & Industrial

176.0
113.0
26.0

100.0
84.0
8.4

113.0
102.0
18.0

213.0
186.0
26.4

119.9
123.0
11.7

134.0
84.9
22.7

253.9
207.9
34.4

137.7
70.0
15.5

140.7
74.2
24.8

278.4
144.2
40.3

Total Operating Profit

Group Companies
Unallocated Expenses
Reported Operating Profit

315.0
3.5
(12.0)
314.3

192.4
0.6
(6.5)
184.9

233.0
2.4
(7.6)
226.9

425.4
3.0
(14.1)
411.8

254.6
1.3
(8.4)
247.5

241.6
1.3
(8.4)
234.5

496.2
2.6
(16.8)
482.0

223.1
1.3
(8.4)
216.0

239.7
1.3
(8.4)
232.6

462.9
2.6
(16.8)
448.7

Operating Margin
Minerals
Oil & Gas
Power & Industrial
Total Operating Margin

19.3%
25.2%
10.7%
19.2%

18.4%
25.5%
6.0%
17.9%

17.1%
24.2%
11.0%
18.1%

17.7%
24.8%
8.7%
18.0%

18.0%
25.0%
7.6%
18.7%

18.2%
23.5%
12.0%
18.0%

18.1%
24.4%
10.0%
18.4%

18.3%
22.0%
8.2%
17.0%

18.5%
22.5%
12.5%
17.9%

18.4%
22.3%
10.4%
17.4%

EBITDA
EBITDA Margin
Operating Margin
Pre-tax Margin
Tax Rate
Net Margin

Source: Company Reports, Dahlman Rose & Company Estimates

* in millions

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EQUITY RESEARCH

Weir Group Plc

Condensed Cash Flow Statement*
CASH FLOW FROM OPERATIONS
Net Income
Depreciation and Amortization
Funding of Pension
Stock-based Compensation
Other Operating
Changes in Working Capital
Net Cash Provided by Operating Activity

2010A

1H11A

2H11A

2011A

1H12A

2H12E

2012E

1H13E

2H13E

2013E

198.7
52.3
(1.8)
3.0
8.4
(67.4)
193.2

118.8
29.0
(0.6)
2.2
12.7
(76.1)
86.0

159.3
31.4
(18.4)
2.7
16.9
(79.2)
112.7

278.1
60.4
(19.0)
4.9
29.6
(155.3)
198.7

144.9
42.1
(0.7)
3.8
12.2
(126.6)
75.7

139.0
43.0
(0.7)
3.8
0.0
49.2
234.3

283.9
85.1
(1.4)
7.6
12.2
(77.4)
310.0

125.4
44.9
(0.7)
3.8
0.0
33.1
206.4

137.2
45.6
(0.7)
3.8
0.0
(33.5)
152.3

262.6
90.4
(1.4)
7.6
0.0
(0.4)
358.8

CASH FLOWS FROM INVESTING

Capital Expenditures
Acquisition/Divestment
Other Investing
Net Cash Provided by Investing Activities

(50.9)
(204.1)
8.7
(246.3)

(36.6)
(12.2)
4.8
(44.0)

(58.8)
(373.8)
7.6
(425.0)

(95.4)
(386.0)
12.4
(469.0)

(55.6)
(118.6)
4.7
(169.5)

(70.0)
0.0
0.0
(70.0)

(125.6)
(118.6)
4.7
(239.5)

(55.0)
0.0
0.0
(55.0)

(55.0)
0.0
0.0
(55.0)

(110.0)
0.0
0.0
(110.0)

CASH FLOWS FROM FINANCING

Change in Debt
Change in Equity
Dividends Paid
Other Uses of Cash
Net Cash Used by Financing Activities

165.5
0.0
(46.7)
(24.4)
94.4

(15.8)
(0.4)
(44.3)
(7.9)
(68.4)

434.0
0.0
(15.2)
(74.4)
344.4

418.2
(0.4)
(59.5)
(82.3)
276.0

172.0
0.0
(54.8)
(12.1)
105.1

0.0
0.0
(54.8)
0.0
(54.8)

172.0
0.0
(109.6)
(12.1)
50.3

0.0
0.0
(54.8)
0.0
(54.8)

0.0
0.0
(54.8)
0.0
(54.8)

0.0
0.0
(109.6)
0.0
(109.6)

42.4
(18.6)
55.7

(25.8)
0.0
79.5

30.3
24.6
53.7

4.5
24.6
79.5

7.3
0.0
108.6

109.5
0.0
115.9

116.8
0.0
108.6

96.6
0.0
225.4

42.5
0.0
322.0

139.2
0.0
225.4

79.5

53.7

108.6

108.6

115.9

225.4

225.4

322.0

364.5

364.5

Net increase (decrease) in cash

Net increase (decrease) in cash from Disct. Ops
Cash, beginning of period
ENDING CASH

Balance Sheet*
ASSETS
Cash & Cash Equivalents
Bank overdrafts & Short term borrowings
Accounts Receivable, net
Inventories
Income Tax Receivables
Other Current Assets
Total Current Assets

2010A

1H11A

2H11A

2011A

1H12A

2H12E

2012E

1H13E

2H13E

2013E

79.5
4.5
353.3
310.2
0.4
25.4
773.3

53.7
7.3
409.7
391.7
0.6
39.4
902.4

108.6
5.3
517.2
469.8
11.5
26.0
1138.4

108.6
5.3
517.2
469.8
11.5
26.0
1138.4

115.9
4.9
509.5
517.4
7.0
42.8
1197.5

225.4
0.0
529.8
487.4
7.0
33.2
1282.8

225.4
0.0
529.8
487.4
7.0
33.2
1282.8

322.0
0.0
492.8
473.8
7.0
33.0
1328.6

364.5
0.0
530.4
487.9
7.0
33.2
1423.1

364.5
0.0
530.4
487.9
7.0
33.2
1423.1

259.7
957.8
41.9
2032.7

272.0
960.2
40.4
2175.0

321.8
1332.6
49.5
2842.3

321.8
1332.6
49.5
2842.3

351.0
1470.0
50.2
3068.7

378.0
1470.0
50.2
3181.0

378.0
1470.0
50.2
3181.0

388.2
1470.0
50.2
3237.0

397.6
1470.0
50.2
3340.9

397.6
1470.0
50.2
3340.9

LIABILITIES
Short-Term Debt
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Pension Deficit
Other Long-Term Liabilities
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY

6.3
409.9
114.3
530.5
361.3
65.0
154.2
1111.0
921.7

9.1
483.5
114.1
606.7
340.9
64.4
163.5
1175.5
999.5

92.0
565.4
138.3
795.7
695.1
84.7
148.7
1724.2
1118.1

92.0
565.4
138.3
795.7
695.1
84.7
148.7
1724.2
1118.1

67.2
503.0
132.5
702.7
897.6
104.3
189.7
1894.3
1173.8

67.2
529.8
130.7
727.7
897.6
103.6
194.1
1923.0
1258.0

67.2
529.8
130.7
727.7
897.6
103.6
194.1
1923.0
1258.0

67.2
512.8
130.0
710.0
897.6
102.9
197.9
1908.4
1328.6

67.2
530.4
130.8
728.4
897.6
102.2
201.7
1929.9
1411.0

67.2
530.4
130.8
728.4
897.6
102.2
201.7
1929.9
1411.0

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES

2032.7

2175.0

2842.3

2842.3

3068.7

3181.0

3181.0

3237.0

3340.9

3340.9

Property, Plant & Equipment

Intangibles
Other assets
TOTAL ASSETS

Source: Company Reports, Dahlman Rose & Company Estimates

* in millions

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Valuation Methodology & Investment Risks

Valuation Methodology
We favor EV/EBITDA and/or P/E multiples to value companies within our coverage universe, with companies with greater international exposure,
larger backlogs, and more modern assets typically receiving higher multiples. We also use earnings multiples with a premium or discount based on
where the oilfield service group is trading relative to the current cycle.

Investment Risks
Primary Oilfield Services Investment Risks Include:
A material change in commodity prices has the potential to change our view on the entire oil service and drilling sector. A deterioration in the
economic climate, increasing non-OPEC oil production or international political and economic risks could impede the price performance of the
shares.

The strength of the global economy and its impact on the global demand for oil and natural gas.

Upstream (E&P) budget fluctuations that directly impact demand for oil services, which may be affected by M&A, commodity prices, or access to
capital markets.

Capacity expansions within various product lines in the oilfield services industry that may create supply overhangs and influence marginal pricing.

Political issues that may lead to higher taxes on the industry or limit access to potential resource developments, due to geopolitical issues or
regulatory changes.

Technology changes that may negatively impact the lifecycle of various products and services.

Company Specific Risks

Rated Sell. Upside Risk to Price Target: A faster-than-expected commodity (natural gas) price rebound would be positive for Weir Oil & Gas and
could drive up earnings and profitablilty faster than expected. This would create upside risk for WEIR.LN stock.

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Disclosures
Disclaimer:
The information presented in this report is for informational purposes only. It was prepared based on information and sources that we believe to be
reliable, but we make no representations or guarantees as to the accuracy or completeness of the information contained herein. This report is not to
be construed as an offer to sell or a solicitation of an offer to buy any security. The opinions expressed in this report may change without notice.

Certification:
Each analyst identified in this report certifies in accordance with SEC Regulation AC, with respect to any company and securities discussed in this
report, that the recommendations and opinions expressed accurately reflect the analyst's personal views and no part of the analyst's compensation
was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein.

Required Disclosures:
No analyst who participated in the creation of this report owns securities issued by the subject company.
Dahlman Rose & Company, LLC, and/or its affiliates may have positions in the securities discussed in this report. However, none of those positions
equal or exceed 1% of the equity securities outstanding for the subject company.
Dahlman Rose & Company, LLC, and/or any of its analysts, officers or employees, or any household members do not serve as an officer, director or
advisory board member of any of the companies discussed in this report.
Dahlman Rose & Company, LLC has not provided investment banking services to the subject company in the past 12 months. It intends to seek to
be a financial advisor or to engage in investment banking services with the subject company and may receive compensation for such services during
the three months following publication of this report. As a result, investors should be aware that the firm might have a conflict of interest in the future
that could affect the objectivity of this report.
Investing in non-U.S. securities, including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be
subject to the reporting requirements of the U.S. Securities and Exchange Commission. There may be limited information available on foreign
securities. Foreign companies are generally not subject to uniform audit and reporting standards, practices and requirements comparable to those
in the U.S. Securities of some foreign companies may be less liquid and their prices more volatile than securities of comparable U.S. companies.
In addition, exchange rate movements may have an adverse effect on the value of an investment in a foreign stock and its corresponding dividend
payment for U.S. investors. Net dividends to ADR investors are estimated, using withholding tax rates conventions, deemed accurate, but investors
are urged to consult their tax advisor for exact dividend computations.
The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an
offer to sell securities described herein, solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any
offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the
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exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Under no
circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada, nor is the information
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Clients (as such term is defined in National Instrument 31-103) with whom Dahlman Rose & Company, LLC deals pursuant to the international
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dealer exemption. Any other recipients should delete or destroy the information contained herein. To the extent that the information contained herein
references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such
securities may not be conducted through Dahlman Rose & Company, LLC. No securities commission or similar regulatory authority in Canada has
reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any
representation to the contrary is an offense.
Dahlman Rose & Company, LLC is not a tax or legal advisor and provides no legal or tax advice or opinions with respect to the securities
recommended in this report.
Dahlman Rose & Company, LLC does not make a market in the securities of this issuer.

Stock Ratings:
Dahlman Rose & Company, LLC assigns the following ratings to the securities of its subject companies:
Buy The fundamentals/valuations of the subject company are improving and the investment return is expected to be 5 to 15 percentage points
higher than the general market return.
Sell The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage points
lower than the general market return.
Hold The fundamentals/valuations of the subject company are neither improving nor deteriorating and the investment return is expected to be in
line with the general market return.

Ratings Distribution:
Distribution of Ratings/Investment Banking Services (IB) as of 09/30/12
Rating
Count
Ratings Distribution
Buy -rated
163
59.71
Hold -rated
105
38.46
Sell -rated
5
1.83

Count
16
6
0

Investment Banking
9.82
5.71
0.00

*Investment Banking services provided by Dahlman Rose & Company, LLC. only.

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