Juxtaposition. Overnight, commodities went for a bit of a run. The Aussie dollar ran back well over 72 US cents (the talk of jawboning from the RBA has already appeared with the currency at a six-week high) as iron ore hit the highest level since last October at US$51.52 a dry tonne — up more than 6% in a day, and well above the six-year low of US$38.30 in December. Iron ore has bounced 18% higher this year after a 39% slide in 2015. And what did we also get this morning? Why, the long-awaited interim results from BHP and the impact of that 39% slide in iron ore prices and the huge sell-off in oil and gas. As a result, BHP slashed interim dividend from 62 US cents a share to just 16 US cents a share, as underlying profit to shareholders (that’s excluding the US$8 billion or more in write-downs and impairments) plunged 92% (yes, 92%) to just US$412 million for the six months to December (from more than US$4.8 billion a year ago).
The company abandoned its “progressive dividend” policy in favour of a 50% cap of net attributable profit to shareholders. But even on that basis, the board pulled a little fiddle to help shareholders maintain a strained smile at least — 50% of US$412 million equates to just 4 US cents a share. The other 12 cents were added to the payout to reflect the differences between profit and free cash flow in the six months (cash flow was higher). It’s an accounting sleight of hand in other words. So instead of a laughably low 4 cents a share payout, the fall is only 74% against the 92% slide in profit. The BHP board of course blamed two key executives, so out goes petroleum head Tim Cutt and iron ore boss Jimmy Wilson. — Glenn Dyer
What is going to give? On Friday night, oil services firm Baker Hughes reported that the number of oil US rigs in use last week fell 26 to 439. A year ago the number of rigs in use was more than 1040. But US oil production stayed resilient, at around 9.1 million barrels a day, down 600,000 barrels a day from the peak of 9.7 million reached last April. Total number of rigs in use last week, including gas (which is now almost unwanted) was 514, down 796 on February of 2015. That is the lowest since 2009. So for a 60% drop in rigs in use, US oil production has only fallen around 6%. But still America is awash in crude.
Data from the US Energy Information Administration last Thursday revealed domestic crude stockpiles rose by 2.1 million barrels last week to a new record weekly record of 504.1 million barrels. Oil prices jumped 7% last night with some believing the market was on the way back, but that was only due to the current US futures contract expiring (and prices sometimes jump sharply on the day that happens). A more sobering analysis came from the International Energy Agency which forecast the oil glut to continue into 2017, saying:
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices.”
Let’s see what happens tomorrow when Saudi Arabian Petroleum Minister, Ali bin Ibrahim Al-Naimi, is due to speak at an energy conference in Houston tonight (our time). — Glenn Dyer
Warren’s change of fortune. Fortune favours the bold or some such is an old adage, but fortune also favours those with fortunes. Just take Warren Buffett and his Berkshire Hathaway. A week before the release of the 2015 annual and fourth quarter reports (plus his legendary letter to investors) this Friday night, Wozza and Berkshire have copped a major break from ratings group, Standard & Poor’s. Back in August, when Berkshire announced the US$37 billion acquisition of Precision Castparts (which required Berkshire take on US$10 billion in debt) S&P warned it might lop two rating notches from Berkshire’s AA rating because of fears of the financial strains on the group from the largest ever deal. But around seven month’s later, we’ve seen financial alchemy as S&P announced there would be no cut because they had changed the basis for rating (valuing) Berkshire from a financial (insurance) company to a broadly based industrial conglomerate. And on this new basis, the ratings group was very cool. S&P now says that it has concluded the Precision Castparts purchase is “neutral” to its AA rating of Berkshire’s debt.
The new “table” outlook reflects S&P’s expectation that Berkshire “will continue to report solid profitability metrics, significant cash flow generation and strong EBITDA margins in the next two years”. But S&P said that it won’t be raising Berkshire’s rating in the next two to three years due to “operating and execution risks” related to the acquisition strategy of the newly minted “conglomerate”. That won’t worry Wozza, because as he said last year, “Berkshire is a triple A rated company in our minds”. Berkshire owns US$2 billion of shares in S&P’s rival rater, Moody’s. What will Moody’s will now do? — Glenn Dyer