Share this article

print logo

Caterpillar faces new risk as plunge in oil prices cuts equipment demand

Caterpillar Inc., already battered by a slump in demand for its mining machinery, faces slowing sales of compressors, pumps and gas turbines as oil companies reduce spending.

The impact will be felt by Caterpillar in early 2015 as drillers cut back and exploration declines, Chairman and Chief Executive Officer Doug Oberhelman said earlier this week.

While Caterpillar forecast in October that sales will be flat to slightly up in 2015, that view might now be optimistic given the decline in crude prices in the past two months, Sameer Rathod, an analyst at Macquarie Group Ltd., said in a Dec. 16 report.

“The bottom line is, it’s a new risk for Caterpillar’s earnings outlook for 2015,” said Matt Arnold, a St. Louis-based analyst for Edward Jones & Co.

Caterpillar’s energy and transportation segment had been a bright spot amid the gloom in the construction and mining markets. The company has seen revenue fall by about $10 billion since 2012 as lower metals and coal prices meant miners bought fewer shovels and trucks. Construction-equipment sales have been slow to recover since the recession.

While the Peoria, Illinois-based company’s signature yellow diggers and trucks are still a core business, it has expanded in the energy market with the acquisition of German engine maker MWM Holding GmbH in 2011. Caterpillar may look at more oil and gas deals, Oberhelman said.

Caterpillar’s turbines are found on offshore oil rigs while its engines and compressors are used to move oil from wells to pipelines and rail cars. The oil and gas industry accounts for about $6 billion to $7 billion of sales.

Turbines used on large production platforms and engines used to move oil and gas from wellheads to pipelines are affected less by short- or medium-term fluctuations in oil prices than engines used for drilling and well-servicing, said Mike DeWalt, a Caterpillar vice president.

With oil heading for its biggest annual slump since 2008, energy companies are scrambling to adjust their costs. Continental Resources Inc., a U.S. producer of oil from shale- rock formations, said this month that it plans to slash spending by 41 percent. Wider high-yield credit spreads on energy companies are a negative for those looking to finance new oil and gas infrastructure, Rathod said.

Oil and gas “has likely entered a prolonged period of volatility at best and/or a long down-cycle,” said Ann Duignan, a New York-based analyst for JPMorgan Chase & Co. who covers Caterpillar and recommends holding the stock, which closed at $93.72 on Wednesday.