Shell’s shock cuts not as shocking as you think
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Version 0 of 1. Was that confidence or complacency gushing out of Shell in the face of falling oil prices and a big miss in fourth-quarter profits? A $15bn (£10bn) cut in spending on new projects over three years sounds enormous until you remember how big Shell is. The reduction is 14%, which seems modest. The case for the defence, of course, is that you can’t run an oil and gas exploration and production titan on a stop-start basis. If you don’t invest when the oil price is $50 a barrel you risk missing the financial prizes that come when $100 is back again. Fair point. Related: Shell slashes spending and calls for North Sea tax cuts All the same, one suspects chief executive Ben van Beurden’s “prudent” approach to spending cuts may turn out to be a first guess. More projects will surely have to be delayed or canned if Brent crude is still plodding along at $50 or $60 a barrel at the end of this year. The “long-term equilibrium” is $90 a barrel, suggested van Beurden, omitting (wisely) to define long-term. “Shell has options to further reduce spending,” he added, with a vague sweep. He was even less precise about the size of cost savings: everything at Shell is “multibillion.” Amid the many uncertainties, there is a solid point of focus: the balance sheet. Shell’s debt ratios are lower than many major rivals’ and the credit rating is pristine. If necessary, it’s plainly possible to let borrowings rise to protect the dividend for a while. For the whole of 2014, the payment to shareholders was improved 4%; for the first quarter of 2015, a same-again dividend is promised. If you trust the solidity, there’s a yield of 5.6% up for grabs. Be wary: if Shell can miss an earnings forecast by 20% in a quarter when the oil price averaged $75, then $50 oil may bring more surprises. The corporate juggling act between dividends and investment looks harder by the day. Competing narratives Is Ronan Dunne feeling sensitive? The chief executive of Telefónica UK seemed overly anxious to claim that his firm’s deal with Sky shows that the UK mobile telephony market is a bear-pit of open and hostile rivalry. Sky will offer its customers mobile services over Telefónica’s O2 network from next year. This, says Dunne, “demonstrates the lively competitiveness of the UK market”. Related: Sky moves into UK mobile-phone market after deal with O2 owner Possible translation: will people please stop worrying about the implications for competition of Telefónica’s £10bn deal to sell O2 to Hutchison Whampoa, owner of Three, thereby reducing the number of UK mobile operators from four to three. Sorry, no, we won’t stop worrying. For a start, the Sky deal doesn’t create a new competitive force. This is a piggy-back deal of modest scope. Sky will rent some wholesale capacity from O2. It will not be investing in new infrastructure. It’s a suck-it-and-see arrangement for Sky. If customers want to buy another product, it will happily accept the incremental revenue. If there isn’t demand, the cost of finding out is tiny. By contrast, combining O2 and Three would represent a big change to the structure of the market. In the current set-up, Three, the fourth largest network, can be fairly seen as the player that keeps the bigger beasts honest. It lives by being fast on its feet and different. Those qualities will be hard to retain if Three is housed under the same roof as O2, or folded into it. Naturally, the mobile operators make counter-arguments. Look, they say, there is a reason why France Télécom and Deutsche Telekom are selling EE to BT, and why Telefónica wants out of the UK: returns here are among the lowest in Europe. Consolidation, runs the argument, allows more money to be spent on networks to keep pace with the whizzy kit they have in parts of Asia these days. It’s a point of view – and definitely worth exploring. But it should be UK regulators who lead the inquiry into the O2/Three deal, not those in Brussels, which is the current plan. Competition watchdogs on the home patch are more likely to see Sky’s mobile entry for what it is: an event that barely moves the competitive dial. Rising spirits Diageo’s shares haven’t traded above £20 for a year. So, on the face of it, it’s odd that they should regain the level after a 23% plunge in pre-tax profits to £1.6bn at the half-year. But not impossible to understand. Currencies, especially the Venezuelan bolívar and the Russian rouble, were largely responsible. Those hits were in the share price already. More interesting for investors was the fact that Diageo’s second quarter was better than its first: the wobble in emerging markets doesn’t seem to be getting worse. Hold the Guinness for now, but it’s a more upbeat song than many consumer goods multinationals are currently singing in Asia. |