Encouraging macroeconomic data and falling oil prices vied for investors’ favour this week. Central banks added to this with remarks about their inflation forecasts, China celebrated Singles Day, the United States celebrated Veterans Day and companies in Europe, in particular, announced their quarterly results. On balance the markets barely shifted this week.
The negative sentiment surrounding oil is caused by the high oil production worldwide.
Ben Steinebach Head of Investment Strategy
The price of a barrel of Brent crude oil fell below USD 80, the lowest level since September 2010. Brent oil is a benchmark crude: a type of oil that the international oil trade uses to classify types of oil with different qualities. Each oil type is priced differently. The name ‘Brent oil’ derives from the Brent oilfield in the North Sea. Belonging to Royal Dutch Shell, it was once one of the most productive oilfields in Great Britain, though it is now nearing the end of its production life. Prices for crude oil from Europe, Africa and the Middle East are based on the price of Brent oil.
The negative sentiment surrounding oil is caused by the high oil production worldwide, coupled with shale oil extraction in the United States, and the less encouraging outlook for global economic growth for the years to come. A meeting of OPEC is scheduled for later this month, though the oil-producing countries are not expected to wish to lower production. An interesting factor is the rumour on the market that oil producer Mexico has taken out insurance for almost USD 800 million against a further drop in oil prices next year.
Oil industry: turned upside down?
The falling oil prices impacted almost the entire oil industry. In the Netherlands, geological survey company Fugro had already been forced to adjust its profit and turnover forecasts, with major oil producers postponing or even cancelling orders. At the same time US oil giant ExxonMobil has had to relinquish its position as the second largest listed company (after Apple) to Microsoft.
The price of Royal Dutch Shell – the largest company listed on the Amsterdam exchange – fell more than 4% over the course of four days’ trading, dragging the AEX down with it. Schiedam-based oil rig builder SBM Offshore was in the news for another reason. On Wednesday the company announced that it will pay a settlement of USD 240 million to avoid criminal prosecution for charges of bribing African and Brazilian officials and fraud: the largest corruption case in the history of the Netherlands.
It was also announced that the authorities have ruled out the possibility that the company will be prosecuted in the US. Prosecution in Brazil is theoretically only possible in the form of a temporary injunction against operating in the country. It seems that a dark chapter in SBM Offshore’s history has been concluded. The day after this announcement the company published poor Q3 results and announced that it intends to go public with its fleet of oil-production vessels. The company will use the proceeds from this sale to further reduce its debt position. More importantly, the company is confident of achieving its financial targets for 2014.
In the United States Halliburton and Baker Hughes, the second and third largest companies in the oil service industry, announced plans for a merger on Thursday afternoon. This will be the largest merger in the US oil industry for many years. If the merger in fact happens, the resulting company will have the largest turnover in the oil service industry. However, the competition, Schlumberger, will remain by far the largest operator, with a market value in excess of USD 122 billion. On Friday morning Boskalis raised its profit forecast for this year. It announced that it is taking a serious look at some divisions of Fugro, in which it recently acquired a 15% interest.
Ahold, Aegon and Singles Day
Lastly, two major Dutch multinationals presented their Q3 results this week. The Q3 results reported by Ahold matched our expectations. Turnover was up by 1.5%, at a constant exchange rate, the increase stemming primarily from the acquisition of 49 Spar branches in the Czech Republic. However, investors were disappointed by Aegon’s results.
Looking beyond this third quarter, though, we believe that the company still possesses sufficient opportunities to improve its shareholder return. For 2015, our analysts expect a total shareholder return of approximately 6.5% from cash dividends and stock buybacks. Monday was Singles Day in China (often compared to Cyber Monday in the United States). This day has developed into the world’s largest online shopping day. One of China’s largest online retailers reported that its turnover for the day was in excess of USD 9.3 billion, an astounding increase of around 62% relative to last year.