2015-09-29 20:40:00
GLENCORE IS DROWNING
Only the makers of cheap TV documentaries give credence to yarns concerning the Bermuda Triangle, a stretch of sea said to swallow ships and aircraft. But plenty of investors buy the scenario set out in report entitled "Bermuda Triangle" from Investec. This envisages Glencore's net debts of almost $30bn engulfing the entire value of its equity. The result was a rout on Monday in the shares of the commodities business.
Affable mining analyst Hunter Hillcoat is an unlikely Nemesis for Glencore boss Ivan Glasenberg. Investec Securities is the kind of middle-ranking brokerage some chief executives and bulge bracket investment bankers look down on. But that gives Investec the independence needed to say what many have been thinking: that Glencore's borrowings might wipe out its shareholders.
You have to choose your evidence carefully to believe in the Bermuda Triangle or in Mr Hillcoat's nightmare scenario. Proponents of the Caribbean Kraken ignore equally high shipping losses in other hurricane alleys. The analyst proposes that if Glencore's earnings per share fell to zero, its shares would be worthless. Companies have proved this need not be the case. Hopes of an earnings revival kept their equity alive.
There are some big gaps between the assumptions of Mr Hillcoat, who thinks spot prices for commodities may stay permanently low, and those of Glencore. He believes net debts could level out at five times earnings before interest, tax, depreciation and amortisation. Some $12bn in long-term debt could then be costly to refinance. The commodities group has a rosier prediction of three times.
Glencore has more than $10bn in short-term credit and has just raised a little under $2.5bn through an equity placing. Even at current commodity prices, it believes it can produce $3bn in free cash flow a year. The company hardly looks as if it is going bust imminently. But fear can induce a doom spiral. This is not a Norwegian metal band, but a feedback loop in which worried customers and suppliers demand safer terms or withdraw support entirely.
Mr Glasenberg cannot dismiss Monday's share fall to one-seventh of the 2011 flotation price as no more than an overreaction to the "what if" of a stock analyst. These are dangerous times for Glencore.
Ben's bear behind
Exit, pursued by a polar bear. Ben van Beurden is pulling Shell out of the Arctic after failing to find oil in commercial quantities off Alaska. A decade-long escapade on ice is over. The chief executive still hopes to lead Shell out of the frozen wastes to a brighter future. But that ambition is melting at the edges.
Cyclical downturns are a test of managerial mettle. The oil price has slumped some 55 per cent to just under $50 a barrel since the phlegmatic Dutchman took over in January 2014. The shares have fallen about one-third. You cannot accuse Mr van Beurden of failing to respond to the new environment. The question is whether his measures, including a takeover of BG Group to create a combined business currently valued at £93bn, will succeed.
Mr van Beurden had no power to influence the outcome of drilling at the Burger J prospect in the Chukchi Sea. But Shell has shown decision in signalling its withdrawal from the Arctic. It has other prospects there. It will not pursue them.
The retreat will assist the downstream expert in his plan to cut capital expenditure. The target for savings this year is $7bn. Shell should be able to save just under $1bn a year by quitting the Arctic. But the immediate financial impact is likely to be a big write-off in the third quarter. The carrying value of the Alaska prospect — $3bn — is more dead than a seal surprised out on the open ice by a big white bear. A fraction of the additional $1.1bn cost of hiring oil rigs and other kit may be recoverable.
At the same time, Shell has lost a notional 4.3bn barrels of oil once believed to lurk at Burger J. The cost of tapping these had been estimated at anything from $55 to $100 a barrel. The BG takeover, also intended to replenish a dwindling production pipeline, was predicated on a price of $70 to $110 a barrel.
Most of the deal price is payable in shares, thankfully. But the takeover faces a more material challenge through possible antitrust intervention in Australia and China.
Mr van Beurden has to juggle the need to secure future supplies with his obligation to keep up dividend payments costing north of $11bn a year, according to S&P CIQ. Underlying earnings are heading south towards that figure. Shakespeare resolved all contradictions with stage magic in The Winter's Tale, the play that includes the famous direction "exit, pursued by a bear". Mr van Beurden, in contrast, is reliant on skill — and liberal helpings of luck — for a happy ending.
Needy Hire
Predict and provide is a risky business model, as the travails of Speedy and HSS illustrate. Both have issued a couple of profits warnings in as many months and wound up looking like the tools they aspire to hire out. Speedy failed to stock enough equipment to meet demand and profits expectations. HSS, more conventionally, had more kit than customers needed.
The greater opprobrium attaches to HSS, because private equity group Exponent floated the company only eight months ago. Its market worth has shrunk by two-thirds to £93m, half its net debts. Chief executive Chris Davies was ousted on Friday.
Belying its name, Speedy is one of those genial plodders making up the long tail of smaller quoted businesses. The company, whose own chief executive left in July, planned to avoid excess capacity by deploying stock better across its depots. The main result of the wheeze was shortages that on Monday triggered a second warning on earnings.
Ashtead, the survivor of a nineties shakeout in quoted tool hire groups, has prospered thanks to diversification and shrewd management. But these businesses too often fail to balance demand, stocks and the debt that supplies them. Dangerous things, tools. And not just because you can hit your thumb with a hammer.
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