James Ashton: Why Shell deal makes shares a raging buy

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Shares in Royal Dutch Shell have drifted up 10% since its controversial £35 billion deal to swallow BG Group closed in February. The appreciation can be put down to the rising oil price rather than investors all coming around to chief executive Ben van Beurden’s way of thinking.

Compared with $27 a barrel earlier this year, Brent crude is hovering close to $50 now. While the heady days of $100-plus won’t return any time soon, at least the market seems becalmed.

From last week’s Opec meeting in Vienna came the clearest signal yet that Saudi Arabia and Iran were no longer trying to out-pump each other to the detriment of others.

It isn’t all good news for van Beurden after Nigerian militia attacked one of his pipelines. But he has more room to manoeuvre tomorrow when Shell presents a strategy update.

Chief among City concerns is that the company overpaid for BG just as the market was tanking.

It gained a pipeline of excellent deepwater and natural gas assets, but also eye-watering net debt of $70 billion (£48 billion). The underlying worry is that Shell’s prized dividend, which has not been cut since 1945 and costs about $15 billion a year, is under threat.

Van Beurden has reassured that is not the case but is busy selling downstream assets and cutting jobs all the same. It looks as though he can run the combined entity off Shell’s pre-takeover cost base. Capital expenditure is expected to be slashed, too.

Analysts at Jefferies calculate the oil major must reduce debt by $27 billion by the end of the next year to hit its targets. With $6.5 billion of sale proceeds in the public domain, Jefferies has pinpointed another $14 billion.

Another idea doing the rounds is that Shell could raise more by spinning off mature assets including its North Sea operations into a separate company.

It might not need to. The takeover looks a good one when oil hits $60 a barrel. Van Beurden is weathering the impact of an oil glut. A year or so from now, expect him to have proved the BG doubters wrong too.

Learn Mandarin, defy the robots

The horrible inevitability of BHS’s failure gave the human cost of this story top billing ahead of the reputational damage to Sir Philip Green — at least for day or so. To lose most of its 11,000 staff from the workforce would be considerable, made worse by the fact that many of these roles are based in small towns where the job market is far from dynamic.

A bigger loss on the other side of the world unsurprisingly made far fewer headlines here but has just as much to say about the future of work. It was reported that Foxconn, which manufactures iPhones for Apple, plans to replace 60,000 factory workers with robots.

The company still has close to a million human staff although the charming boss Terry Gou is on record as saying that managing “animals” gives him a headache. 

Gou came up in conversation last week with Alec Ross, an adviser to Hillary Clinton on technology policy, at a Tata-sponsored dinner at the Hay Festival. As Ross puts it in his book The Industries of the Future, human labour involves very little upfront capital expenditure — compared  with the cost of buying machinery — but higher operating expenditure because robots don’t draw a salary. As robots become cheaper, that opex looks more and more costly. 

It begs the question of where humans will fit in in the new world order. Far fewer of them will be standing in department stores or on factory floors.

The Cambridge academic Peter Mandler persuaded a Hay audience that social mobility had more to do with the creation of better jobs than a good education. Yet by some estimates, two-thirds of the jobs our children will do have not been invented yet. So how to prepare them? Ross assured me that classes in computer coding and Mandarin would be a good start.

Steely resolve sets an example 

Incidentally, what to make of Tata’s decision — if it comes — to hang onto the Port Talbot steelworks that looked likely to go the way of BHS a few months ago?

What a victory that would be for ministers Sajid Javid and Anna Soubry.

My rule of thumb is that when politicians get involved in a corporate crisis, it is usually already all over bar the shouting.

By showering Tata with loans and relieving it of some of its pension liabilities, high command in Mumbai appears to have had a change of heart. Steel crisis aside, Tata has a longstanding commitment to the UK.

I wonder what other inward investors make of the treatment they have received? There are plenty of domestically owned businesses that could benefit from interventions to make them more globally competitive too. Best to form an orderly queue.

Source Article from http://www.standard.co.uk/business/james-ashton-why-shell-deal-makes-shares-a-raging-buy-a3264776.html

June 6, 2016 |
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