Is Opec about to turn on the taps? The cartel that pumps a third of the world’s oil meets in Vienna this week with Russia and other major producers set to decide whether to increase production.
A production ceiling of 1.8 million barrels per day has been central to the recovery in oil prices over the past year and a half.
In the run-up to the meeting, the oil price has been volatile. President Trump has called on the cartel to increase output, with America said to be privately pushing for a 1 million barrel per day increase amid concerns over high fuel prices but Opec members appear divided.
Saudi Arabia, the cartel’s biggest producer, and Russia, the world’s biggest producer, are said to support an increase yet Iran says that it has Venezuelan and Iraqi support to veto any such proposal. Reports by Bloomberg yesterday suggested that an increase of 300,000 to 600,000 barrels per day was under discussion.
So how concerned should investors in Britain’s biggest oil companies be about the outcome?
The shares if Royal Dutch Shell and BP have been broadly tracking fluctuations in the price of crude in recent months, for the obvious reason that higher oil prices mean higher revenues and profits.
Shell said that, in its case, every $10 increase in oil prices translates to about $5 billion in extra cashflow.
The Anglo-Dutch oil group reported profits of $12.1 billion in 2017 from global operations ranging from oil and gas exploration and production to refining and fuel retailing. It has spent the past few years reducing huge debts amassed by taking over BG Group in 2016 just as oil prices were plunging, and has sold close to $30 billion of assets.
The short-term prize for investors is a promised $25 billion share buyback to offset the dilution from shares issued during the BG takeover and through its scrip dividend scheme, under which part of the dividend was paid as shares to ease the strain on its balance sheet.
Shell disappointed investors in late April by failing to resume the buybacks then, citing the need for more progress in reducing the debts.
Given the feed-through, Shell enjoys from higher prices, the fact that crude has remained well above $70 per barrel and even touched $80 can only have helped with cashflow. This could hasten debt reduction enough to get the buybacks under way sooner rather than later.
However, Shell’s plans are not premised on prices that few would have predicted at the start of the year. Bruised by the experience of oil falling to less than $30 a barrel in early 2016, Shell, like its rivals, has put emphasis on calibrating its business to succeed at much lower prices through efficiencies.
It generated as much operational cashflow last year, with oil at about $54 a barrel, as it did in 2014 with oil at about $99 a barrel. New investments are sanctioned only if they can break even at $40 a barrel.
In fact, the decision to hold fire on resuming buybacks illustrates what Shell’s executives promised: that they are executing “capital discipline” and not getting carried away.
Even if Opec’s decision results in oil falling below $70 or even $60, this should not derail Shell’s long-term growth plans, which include bringing on new production and exploiting the commanding position it had built in liquefied natural gas markets through the BG takeover.
Tempus tipped BP as a “buy” last month on the grounds that it should soon start generating a lot of free cashflow and should soon have the ability to return more of that to shareholders, irrespective of the oil price. Shell looks to be in a similar position.
ADVICE Buy
WHY Configured to withstand far lower oil prices; any weakness in shares after an Opec production rise could be a buying opportunity
Informa
A decade after UBM and Informa first held talks over a merger, the world’s largest operator of business events and exhibitions has finally been created, although this time it is Informa that has played the role of acquirer rather than UBM.
If there was any doubt over the terms of the deal, they appear to have been dispelled. The upwards trajectory of the Informa share price to 835¼p since a recommended £3.9 billion cash-and-shares deal was agreed in January suggests the market likes it and, following the admission of the new Informa shares issued yesterday, the company has a market value of about £10.4 billion.
The numbers are impressive. The combined group hosts more than 500 industry shows, business exhibitions and conferences in 30 countries, running events such as World of Concrete and World Tea Expo.
Although crunching the two companies together will produce synergies of at least £60 million in the second full year post-completion, mainly from removing the overlap in corporate back office functions, the new-look Informa, led by Lord Carter of Barnes, has insisted it was a growth-driven acquisition, rather than one based on synergies. It has pointed to the improvement in the quality of its earnings, thanks to the predictability of two thirds of its revenues, while its free cashflow would rise to about £600 million.
By swallowing UBM, Informa has established itself as the global leader in a still highly fragmented industry. By adding UBM’s 4 per cent market share to its existing share of 3 per cent, the FTSE 100 group has overtaken Relx, the former Reed Elsevier, with 5.4 per cent, as well as Ascential, formerly Emap, and Daily Mail and General Trust.
Like their rivals, Informa and UBM have their origins in business and trade publishing, but in recent years had refettled their strategies to focus on more lucrative business-to-business exhibitions and data management. So while Informa has a strong position in exhibitions serving the transport sector, it also owns the complementary Lloyd’s List, the maritime industry bible created in 1734 when Edward Lloyd pinned a copy of his shipping list to the wall of a London coffee shop.
ADVICE Hold
WHY Shares have run up but offer long-term growth
