Category Archives: Companies

Dong Energy’s IPO shows why offshore wind is more than hot air

Like Saudi Aramco, Dong Energy is now in the midst of preparing for an initial public offering.

The Danish energy giant’s June listing is expected to value the firm at up to $16bn (£10.9bn), making it one of the biggest flotations of the year. It will of course be dwarfed by Saudi Arabia’s oil colossus, which has been valued (perhaps overenthusiastically) at up to $2trn, but it’s still not to be sniffed at.

I think the two energy companies make for an interesting comparison. On one hand, you have Saudi Aramco – a longtime oil Goliath that has provided the Gulf state with lucrative revenues, but has recently fallen into comparatively tougher times as a result of the oil price rout. Saudi Arabia has now had to stop using its oil revenues as a piggy bank, has tapped the debt market and will be tapping the equity market in order to get rid of its deficit (which came in at a national record of $98bn last year).

I’m sure its plans to raise money will succeed, as well as its new strategy to diversify its economy away from black gold. But what for oil itself? Where will it sit in a rapidly changing energy sector where it must compete with other sources such as shale, at a time when the West is pushing energy-efficiency and a move to renewable power, while China’s energy demand is slowing down as its economy slows?

This brings me on to Dong. The energy firm, which counts the Danish government as its biggest stakeholder, used to have a major focus on coal but has now transformed itself into the world’s largest offshore wind farm operator. It has tried – unsuccessfully – to sell its oil division, as it looks to shed its “dirtier” assets to become greener than green.

Its efforts have paid off. Since 2013, when it was still struggling post-financial crisis and Goldman Sachs bought a stake in the firm (amid a gigantic public furore into the influence of the US investment bank on a state utility), it has increased its profitability – thanks to its offshore wind division.

Renewables are expensive and controversial. While they make sense environmentally, they require hefty state subsidies in the transition period and transitioning too fast can be a costly burden. Certain types can also be less reliable, such as solar and wind, as they are dependent on certain weather conditions.

In the UK (where Dong makes large profits), energy secretary Amber Rudd has called for deep cost cuts to offshore wind farms if they wish to receive billions of pounds of new subsidies.

But – and excuse the pun here – they’re the way the wind is blowing. Political pressure to implement and raise renewables targets mean that they’re here to stay. They just make long-term sense, despite their short-term challenges.

Perhaps it is a little simplistic to say that oil is the past and renewables are the future, especially at a time when the former is relatively cheap and the latter still expensive. And oil is still one of the world’s major energy sources, while renewables are a mere pipsqueak. A pipsqueak still relying on handouts from mum and dad.

I’m sure bankers and investors will be able to profit from Aramco’s IPO more than Dong’s, despite the changing fundamentals.

But with a move to greener energy sources inevitable in the developed world and oil reserves (and revenues) depleting, I wouldn’t be surprised to see the balance changing – after all, the vampire squid must be smelling money…

BHP investors: hold on to your seatbelts, you’re in for a bumpy ride

This week, Mike van Dulken and Augustin Eden from Accendo Markets warn that BHP Billiton investors should brace themselves for legal action of BP proportions…

BHP Billiton (BLT) is this week underperforming a similarly weak commodity sector, one which is already under the cosh from a US dollar rebound, an oil price turning over from its highs and persistent global growth concerns after the latest China data sapping investor sentiment. The reason Billiton’s faring worse than its peers stems from news of a $44bn civil legal challenge from Brazilian federal prosecutors related to last November’s Samarco dam failure. That in itself may appear to be a minor driver. It’ll be sorted out soon, won’t it?

Er, well, something similar happened to BP about six years ago and this has quite rightly spooked investors, who would now appear to be pricing in the prospect of long and protracted litigation akin to that which BP only put to bed in July last year – a whole five years and $53.8bn after its 2010 Deepwater Horizon Gulf of Mexico disaster!

The claim against BHP Billiton relates to clean-up costs for waterways and villages, community rebuilding and compensation for the deaths of 19 people and resulting homelessness inflicted on a further 700. Sound familiar?

While BP worked tirelessly to limit the impact (both environmental and financial) of its disaster, several attempts to close the affair failed, and now a fresh legal challenge for BHP Billiton sees its situation echoing that endured by BP. The March 2016 settlement between BHP Billiton, its domestic partner Vale and the Brazilian government was potentially just the beginning of a long road. While there remains the possibility that such an imposing precedent as BP’s Gulf of Mexico disaster is inflating the claim against BHP, one can’t help but see investors take flight at the prospect of added risk in an already risky sector.

Sure, the Brazilian government has form for demanding initially huge reparations for environmental disasters before conveniently reducing them, and a smaller settlement may well be agreed for BHP and its Samarco colleagues. But there is no guarantee of this. Then again, this is Brazil, where the president faces impeachment and replacement by any one of a number of equally dubious cronies.

BHP shares are still holding their uptrend from 2016 lows. Just. However, after giving up 50 per cent of their 2016 gains (now up just 40 per cent YTD vs highs of 80 per cent on 21 April), we have to wonder whether an already difficult situation could get even messier.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Exclusive: GMO’s CEO Brad Hilsabeck to depart

The chief executive of US investment giant Grantham, Mayo, & van Otterloo (GMO) is stepping down after five years in the role, Hot Commodity has learnt.

Brad Hilsabeck, who joined the Boston-based asset manager in 2003, will quit as chief executive on 30 June 2016, GMO confirmed today.

The reason behind his departure was not disclosed. He will remain a member of the GMO board of directors.

GMO, which has more than $118bn in assets under management, said that Peg McGetrick will succeed Hilsabeck as chief executive on an interim basis.

McGetrick previously served as a portfolio manager for GMO’s international active equity team from 1984 to 1996, and was a partner at the firm from 1988 until 1997. She then left GMO to set up Liberty Square Asset Management and re-joined GMO as a member of the board of directors in 2011.

GMO was co-founded by British-born financier Jeremy Grantham, who is known for his correct predictions of various stock market crashes including the dotcom bubble and the global financial crisis.

The bearish investment strategist said in an interview with the Financial Times last year that the stock markets “will be ripe for a major decline” at some point in 2016, which could result in several government defaults.

BP boss Bob Dudley’s proposed pay rise is arrogant and offensive

Bob Dudley is usually pretty good at PR. The BP boss took the helm of the FTSE 100 oil major just after the 2010 Deepwater Horizon disaster – the biggest oil catastrophe in history – when its reputation was in tatters. Since then, the American executive has had to steer the company during an eye-wateringly difficult commodities rout, with the future of the oil market still in question.

At results conferences he usually made an effort to greet all us journalists individually, with a little comment to show that he actually registered who we were (“Ah City AM is a great paper” he said, having seen my name badge), something which I have found that few CEOs bothered to do.

But today it seems that he’s lost his touch. Unsurprisingly, the majority of shareholders voted against BP’s remuneration policy, which proposed hiking Bob’s pay up by 20 per cent to almost $20m (£14.1m) for 2015.

Put this figure alongside BP’s mammoth $5.2bn loss last year and 7,000 job cuts and it looks bad. Marie Antoinette bad.

I’ve seen commentators today argue that poor, overworked Bob has had a tougher time of it last year than a CEO would during a commodities boom (which is undoubtedly true) so he deserves the extra cash.

With this, I whole-heartedly disagree. I am sure that Bob’s job has been more stressful than any of us can envisage; trying to satiate employees, shareholders and everyone else while oil prices remain so painfully low must be nearly impossible. But I cannot imagine anyone in any other job being able to justify earning MORE money by arguing that the company – and their industry – is doing badly.

If that were the case, most journalists in the country would have been raking it in over the last decade, let alone supermarket employees etc etc. There are plenty of people all over the country working harder in tough conditions – this is no excuse for higher remuneration amid a backdrop of job cuts.

The other factor making Bob look bad is that his counterpart at FTSE 100 competitor Royal Dutch Shell, Ben van Beurden, took a whopping pay cut last year to €5.6m (£4.5m).

When we’re talking about such huge, incomprehensible sums it seems unfathomable why Bob would not have followed suit. He’s not stupid; he must have realised what the reaction would have been.

I’m not left-wing by any means – I support wealth creation and capitalism. But surely taking a salary of, say, a mere £5m would be enough for Bob and his family to live in the lifestyle they have become accustomed to, while sparing his reputation?

For sadly I think today’s events show that Bob now appears out of touch with his shareholders and – even worse – that he doesn’t care.

M&S should have patched up the holes in its clothing division by now

The phrase “progress is a slow process” could have been written to describe Marks & Spencer’s long-awaited turnaround of its lacklustre clothing division.

Today’s fourth-quarter trading update showed yet another decline in sales (down 1.9 per cent, or 2.7 per cent stripping out any new acquisitions or non-comparable aspects) that once again contrasted dramatically to its buoyant food business.

New(ish) boss Steve Rowe has deemed the results “unsatisfactory” and vowed to address it – just as his predecessor vowed to do and no doubt a flurry of highly-paid creative directors and marketing consultants etc etc.

The real question is why is it taking so long? Does the M&S team not read the multitude of commentary about why its fashion lines are so undesirable? Admittedly, certain newspapers that count Marks and Sparks as advertisers will be giving a kinder view of the problem, but there is certainly enough independent analysis out there.

To me it is mind-blowingly obvious that the types of clothes that would sell well at M&S would be: good quality classic workwear; basics such as polonecks and jumpers in neutral colours, not just fluoro-pink (I struggled to find a black poloneck when I was last in there, let alone one in a size 8); middle-of-the-road flattering skirts and dresses that would suit the average person (A-line rather than horrendously unforgiving bodycon). More plain, less cheap airhostess patterns. M&S is NOT Maria Katrantzou and never will be (or should be).

Taking a look at the M&S website today, I trawl through the “New In” section of the womenswear collections.

We have a leather a-line wrap skirt that looks concerningly similar to the outfit worn by serial killer Dexter from the eponymous Netflix series when he butchers his victims.

A white, tassled, lace vest top that looks like something you’d find in the New Look sale but at a far higher price (no disrespect to New Look, but it’s different markets).

Oh, and dungarees. This item in particular makes me question whether M&S has an idea – or even cares – who their customer actually is. The only people I know who would wear dungarees would be hipsters or the very young – probably bought from Topshop – surely not the key demographic for this supposedly high street staple store?

Of course this is not to say there is not a single item I’d actually buy in M&S. They do produce some nice jumpers and if I looked very, very hard, there might be the odd jacket that’s passable.

But here lies the problem. People lead busy lives and every decision you make in your leisure time is the one that you think gives you the best odds of delivering what you want. If you choose a restaurant, it’s the one you think you’re most likely to enjoy that evening. If you choose a shop, it’s the one where you think you’re most likely to find clothes you like. Why would you go to a shop where you might be able to find 2 items out of 100 that you like, when you could go to another and perhaps find 15 out of 100?

It would be a shame to see such an historic brand as M&S lose its clothing division and effectively become just another supermarket. There is still potential for a turnaround – but whether Steve Rowe will be the man to do it, I’m yet to be convinced.

There’s more to Glencore’s agri sell-off than meets the eye

This week, Mike van Dulken and Augustin Eden from Accendo Markets explain why Glencore is still keen on the agriculture sector despite selling off its business…

Deleveraging in the mining sector continues, with Glencore managing to offload 40 per cent of its agricultural business to Canada Pension Plan Investment Board (CPPIB). But Glencore’s situation is rather different from that of sector peer Anglo American, which we discussed a while back.

Glencore struggled through the latter part of 2015 with a massive debt burden, the result of huge over-investment just around the time when commodity prices began turning over, and its shares were part of a group that weighed heavily on the FTSE 100 index last year.

While we’ve seen action taken by the blue chip miner to reduce its debt load before now, the partial sale of its agricultural arm is an indication that there are indeed buyers for mining assets. Sure, the $2.5bn price tag fell short of analysts’ expectations, but it was bang on Glencore’s guidance and has put some much-needed funds into the coffers, which the company says it will use to… expand its agricultural assets. Wait a minute. Glencore is selling part of its agricultural business in order to buy other agricultural businesses? Mad as it sounds, that seems to be correct.

Glencore is currently – despite this deal – a major exporter of grains in Russia, Canada and Australia. It shifted around 44 million tonnes of the stuff in 2015 but saw profits cut in half by an oversupplied and stagnating market. So what Glencore may be engaged in here is a clever marketing ploy – those being somewhat of a speciality of the commodity trading giant. It clearly still sees value in agricultural commodities, otherwise it wouldn’t be looking at South America and Brazil (the world’s #1 soy bean exporter) for potential acquisitions in that sector, right?

The other market in which Glencore lacks a big footprint is the US, and understandably so – the strength of the dollar making US exports less competitive means it’s not a priority right now. But what about the outlook for US monetary policy? If the Fed continues to be dovish – stamping down the hawkish dissenters – then the outlook for the dollar would be bearish, which would strengthen the Canadian Dollar and make Canadian exports less competitive. While Glencore shouldn’t and probably isn’t making a call based on FX forecasts, isn’t it a little funny that it’s sold a 40 per cent stake in its agricultural business to the Canadian Pension Plan Investment Board?!

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Exclusive: Investec dumps Bell Pottinger over Gupta contract

Investec has severed ties with Bell Pottinger, after it emerged that the public relations firm has agreed to represent a holding company owned by South Africa’s controversial Gupta family.

It is understood that the South African bank stopped enlisting the services of Bell Pottinger within the last two weeks, after Johannesburg-based newspaper Business Day reported that the PR firm had taken on the Guptas’ Oakbay Investments as a client.

The Gupta family’s close relationship with President Jacob Zuma is at the centre of the controversy, with critics accusing the family of wielding improper political influence in order to “capture the state” for the sake of its own business interests, which range from media to mining.

Senior politicians recently claimed they were offered cabinet positions by the family, sparking a corruption probe, but the Guptas deny the allegations and say it is part of a plot to oust Zuma.

Bell Pottinger was hired to manage the flurry of bad press surrounding Oakbay, one of the two main holding companies that look after the Guptas’ businesses.

Last month, allegations emerged that the South African mining authorities, under the family’s influence, pushed Swiss resource giant Glencore to sell one of its coal mines to Tegeta Exploration and Resources, a mining company part-owned by Oakbay.

Duduzane Zuma, the son of the President, has direct or indirect holdings in a number of Gupta/Oakbay entities, making the whole situation even murkier. The Guptas deny the accusations.

Bell Pottinger is no stranger to controversy itself. The firm, founded by Margaret Thatcher’s PR guru Lord Bell, has represented clients including shale gas fracking firm Cuadrilla, Asma al-Assad, the wife of the Syrian dictator, and the governments of Bahrain and Egypt.

This is not the first time that Bell Pottinger had risked ruffling Investec’s feathers. In 2014, Lord Bell made an infamous gaffe when he claimed all bankers were “criminals”, at a time when Investec was one of the firm’s clients.

Investec, which has a number of existing relationships with other PR firms, declined to comment.

Bell Pottinger declined to comment.

BT and Openreach? It’s complicated, says TalkTalk

Jessica Lennard, director of corporate affairs and regulation at TalkTalk, tells Hot Commodity why Ofcom’s report brings more questions than answers for BT…

It was another big week for the telecoms industry, as Ofcom emerged from its bunker after a year-long consultation on the current state of the sector. Its main conclusions (that the UK is lagging badly behind on the technology of the future, fibre to the home; and that BT is systematically abusing its ownership of the national network, Openreach) came as no surprise to many. The fact that the regulator’s 108 page report holds few concrete policy proposals to remedy its fairly punchy findings was nonetheless greeted with widespread frustration by commentators, customers and BT’s rivals.

BT has remained ostensibly bullish as whispers about the need for a break-up have grown into a roar over recent months. But an 11th hour ‘coincidental’ offer of an extra £1bn investment (presumably found down the back of the sofa) laid bare quite how nervy the ex-monopoly has become. BT celebrated a ‘victory’ yesterday, but smart shareholders will now want to know what exactly the regulator intends to do – did they really “bottle it”, in the words of Lib Dem Leader Tim Farron? Or could this be the start of a smart negotiation by Ofcom chief executive Sharon White, who was quite clear that full separation remains on the table until further notice.

One assumes this is by no means a settled debate for BT itself. Part of the business is clearly pulling away into retail, with aggressive expansion into mobile and TV – expensive pursuits that would benefit nicely from a big wad of cash from spinning off Openreach. Instead, BT’s beleaguered chief executive finds himself embroiled in a seemingly never-ending national debate over a crumbling infrastructure network. Openreach may still symbolise BT’s engineering heritage, but if Sharon White has her way and imposes a kitchen sink’s worth of new regulation, will keeping it be worth the trouble?

This commentary was provided exclusively by Jessica Lennard at TalkTalk for Hot Commodity.

There are still some gems among Anglo American’s junk heap

This week, Mike van Dulken and Augustin Eden from Accendo Markets mine a little deeper into Anglo American’s “reversification”.

Shares in Anglo American (AAL), a mining giant that’s always had diversity at the centre of its business model, were the worst performing on the FTSE 100 in 2015. Such diversity was key to maintaining profitability in all commodity price conditions, which had been good for so long. But it’s clear that there’s now just one set of conditions: awful. It’s now become necessary to divest and Anglo American is just the latest miner to announce its plan to streamline its exposure. In this case, we’ll see its portfolio reduced to just three products from nine.

High growth emerging markets are, of course, seen as a bellwether for the commodities space as a whole. It’s little surprise that a perceived slowdown in China has dented a steel industry that’s been producing at very high levels for years. Iron ore and coal, the latter also highly out of favour as an energy source, are thus prime candidates to be dropped from a highly diversified miner’s repertoire. Copper, on the other hand, is a commodity that’s able to move with the times, present as it is not just in heavy industry and infrastructure, but also essential in the microelectronics that will dominate any economy that makes the transition from manufacturing and export-led to consumption and services-led.

With precious metals miners clearly benefitting from renewed safe haven demand in early 2016 and a global car industry that’s not only too big to fail (forget about the banks – this one really is), but subject to tighter controls given global warming and a certain car manufacturer’s recent antics, it makes sense to keep producing these products. Furthermore, the luxury goods market may well be oversold at the moment as investors connect slowing EM growth with a corresponding slowdown in the growth of the middle classes in that part of the world.

It’s pretty clear that slowing economic growth – or “continued transition” – needn’t automatically mean people are getting poorer. If anything, the western lifestyle should only pervade emerging markets more as their populations, more exposed to international markets every day, are increasingly freer to strive for material success. So things like diamonds, if you’re lucky enough to be mining them, look good too.

As far as Anglo American is concerned, there are of course positives and negatives in all this. The company is the world’s largest platinum group metals miner and owns DeBeers diamonds. Tick! However, with such a large portfolio of things no one wants (iron ore, coal…) for sale, Anglo finds itself operating in an already oversupplied buyer’s market as it tries to offload them. That, unfortunately, puts a big fat cloud of uncertainty over the company’s efforts. Yet with the entire sector plagued by exactly this type of uncertainty, what’s new?

And with ratings agency Fitch having today downgraded the miner’s credit rating to junk, one might be spooked by the news and worried about the miner’s future. However, its shares remain on a northerly charge from January all-time lows, almost doubling on improved sentiment towards its turnaround strategy, and they haven’t even batted an eyelid at this morning’s downgrade (AAL shares are currently up 7 per cent, near their highs of the day). Post crisis, we all know the ratings agencies are last to the party.

This analysis was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com