Saudi Arabia says $30 oil is ‘irrational’
Saudi Arabia has described the collapse in oil prices to below $30 as “irrational” and expects the market to recover in 2016 even as the country continues to keep production high.
Khalid al-Falih, chairman of state oil company Saudi Aramco, told the World Economic Forum in Davos that current prices would not last, with many smaller producers facing financial difficulties.
“The market has overshot on the low side and it is inevitable that it will start turning up,” said Mr Falih, predicting higher prices by the end of the year.
He reiterated that Saudi Arabia, the world’s biggest oil exporter, would not cut supplies unilaterally or make way for rival producers.
A surge in US shale output over the past five years has contributed to a global supply glut that has pushed oil prices down 75 per cent in 18 months. The sell-off has accelerated this year, with crude dropping 30 per cent as Iran, Saudi Arabia’s regional rival, prepares to re-enter the market after the lifting of sanctions.
The latest downward lurch in oil prices comes as fears of a wider global economic slowdown have rattled financial markets and placed further strain on the budgets of Opec’s financially weaker members.
While he called the short-term oil outlook “bleak”, Mr Falih said Saudi Arabia, which is considering a stock market flotation of part of Saudi Aramco, would weather the downturn better than many of its rivals.
US shale producers are pumping flat out in a bid to generate enough cash to pay down large debts built up during rapid expansion, as prices averaged near $100 a barrel between 2010 and 2014. Many are predicted to go bankrupt this year if prices do not rise above $30 a barrel.
Saudi Aramco has little debt and pumps almost one in every nine barrels of oil in the world. “If prices stay low we will be able to withstand [it] for a long time,” said Mr Falih. “Obviously we don’t hope for it.”
Several Opec members — including Venezuela and Iraq — are keen to see action to support prices.
On the panel Emmanuel Kachikwu, head of Nigeria’s state oil company, called for an emergency meeting of Opec ministers. “The price today is not the right price,” he said.
Saudi Arabia has said it would consider production cuts if other Opec members participated and if the cartel was joined by the largest producers outside the group, such as Russia.
Mr Falih said, however, that in contrast to events such as the global financial crisis, which led Opec to cut its production, the advent of US shale oil had been a structural supply shift.
His comments suggest Saudi Arabia believes cuts may not be able to influence the price even with the help of other countries.
“Saudi Arabia has never advocated that it would take the role of balancing market against [the] structural imbalance that was emerging,” said Mr Falih, adding he had always believed $100 oil was too high a price, incentivising rival oil producers and alternative energy sources.
Highlighting the challenge of managing supply with non-Opec members, Ilham Aliyev, president of Azerbaijan, told the panel his country was in principle in favour of cuts but he said these should fall on the largest producers.
“We are not a big producer,” he said. “But I think that if we have more co-ordination between Opec members and large non-Opec members with respect to reduction of production then maybe we can have results.”
Azerbaijan pumps about 800,000 a barrels a day — less than 1 per cent of global supply.
On Thursday Brent rose $1.46, or 5 per cent, to $29.31 a barrel.
--> +1.55% After Hours
* Reports Q4 (Dec) earnings of $0.65 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus of $0.63; revenues fell 38.7% year/year to $7.74 bln vs the $7.79 bln Capital IQ Consensus.
* Capex (excluding multiclient and SPM investments) is expected to be $2.4 billion for 2016. Capex for the full year 2015 was $2.4 billion.
* "Fourth-quarter revenue decreased 9% sequentially driven by the continuing decline in rig activity and persistent pricing pressure throughout our global operations that also suffered from activity disruptions and project delays and cancellations. North America revenue fell 14% sequentially as the US land rig count declined 15% and customer E&P budgets were exhausted. International revenue declined 6% due to the combination of customer budget cuts, the start of the seasonal winter slow-down, persistent pricing pressure, and the largely muted year-end product, software, and multiclient seismic license sales. "Among the business segments, Production Group revenue declined by 10% on lower pressure pumping services in North America. Reservoir Characterization and Drilling Group revenues declined sequentially by 7% and 8%, respectively, on lower demand for exploration-related products and services in the International Areas as customer budgets were exhausted. These effects were amplified by the almost complete absence of the year-end product, software, and multiclient seismic license sales that have typically offset seasonal winter slow-downs in previous years...
* We remain constructive in our view of the market outlook in the medium term, and continue to believe that the underlying balance of supply and demand will tighten, driven by growth in demand, weakening supply as E&P investment cuts take effect, and by the size of the annual supply replacement challenge."
* Expects to close Cameron (CAM) acquisition in Q1.
* New share repurchase program of $10 billion approved
Peers: HAL, BHI, WFT; ETF: OIH.
Closing Market Summary: Indices End in the Middle of Their Trading RangesThe major averages ended the Thursday session off their highs, as a rebound fizzled out in afternoon action, leaving the key indices near the middle of their trading ranges. The rebound in equities took place along with a similar effort in crude oil. The commodity and the stock market lost some of their momentum once the energy component traded above the $30.00/bbl price level. The Dow Jones Industrial Average (+0.7%) lead the S&P 500 (+0.5%) and the tech-heavy Nasdaq (UNCH).
Ahead of today's session, the European Central Bank left its deposit facility rate and refinancing operations rate unchanged at -0.3% and 0.05%, respectively. However, ECB President Mario Draghi stated that the central bank "will need to review and therefore possibly reconsider" its monetary policy stance in March as downside risks have increased in 2016. Mr. Draghi's comments invited heavy speculation regarding future stimulus provisions, lifting futures to new highs.
Oil was able to rally in unison with equity futures, as the oversold commodity sought to recover from a 20.0%+ decline since the start of 2016. WTI crude continued its rally despite poor readings from the Energy Information Administration's weekly inventory report. The report showed an inventory build of 3.979 million barrels (expected 2.811 million barrels) while the gasoline inventories report showed a 4.563 million barrel build (expected 1.378 million barrels). WTI crude was up more than 6.3% before it ticked down from its high into the commodities pit session close, ending 4.2% higher at $29.54/bbl.
In front of the pack, energy (+2.9%), telecom services (+2.4%), consumer discretionary (+1.4%) and materials (+0.9%) lead while financials (-0.3%), health care (-0.3%), and utilities (UNCH) trailing.
Looking at the energy sector, component Kinder Morgan (KMI 13.88, +1.87) climbed 15.6% today, thanks to positive price action in crude oil. Additionally, the company reported above-consensus Q4 earnings. Elsewhere in the group, Dow components Chevron (CVX 81.05, +2.07) and Exxon Mobil (XOM 74.10 +0.92) underperformed the space with respective advances of 2.6% and 1.3%.
Moving to the health care space, heavyweight UnitedHealth Group (UNH 113.50, -1.29) trailed the sector with a decline of 1.1%. This came after the company helped the health care sector top the leaderboard yesterday. On a related note, biotechnology showed relative weakness throughout today's session. The iShares Nasdaq Biotechnology ETF (IBB 278.75, -6.74) slid 2.4%% after yesterday's 3.5% climb.
In the technology space (+0.6%), large-cap constituents Apple (AAPL 96.30, -0.49) and Microsoft (MSFT 50.48, -0.31) were unable to make any headway. Meanwhile, data storage names posted some of the steepest declines with Seagate Technology (STX 27.56, -1.66) and Western Digital (WDC 43.94, -1.85). The two names declined 5.7% and 4.0%, respectively. Elsewhere the high-beta chipmakers showed relative strength, evidenced by the 1.5% gain in the PHLX Semiconductor Index.
In specific industry news, rail companies struggled following Union Pacific's (UNP 71.00 -2.61) disappointing earnings results this morning. The company fell 3.6% after announcing that revenue fell 15.4% year-over-year in Q4. The company cited uncertainty in the energy market and the relative strength of the dollar for the shortfall. Fellow rail company, Norfolk Southern (NSC 70.07, -1.11) felt some of the same headwinds, as it ended its day lower by 1.6%.
Treasuries retreated for most of the session as the rally in equities and oil kept buying suppressed. During the afternoon retreat, the benchmark note was able to move off its low, but the 10-yr yield still ended higher by three basis points at 2.01%.
Today's trading session was true to recent form, generating volume of more than 1.1 billion shares at the NYSE floor.
Economic data has included weekly initial/continuing claims and the January Philadelphia Fed Survey.
- Initial claims for the week ending January 16 were higher than expected, rising 10,000 to 293,000 (consensus 280,000).
- There were no special factors influencing initial claims, which have been bounded between 250,000 and 300,000 since July 2014. The latest reading, however, is the highest level of claims since the first week of July 2015.
- With the latest reading, the four-week moving average for initial claims increased by 6,500 to 285,000, which is the highest average since July 11, 2015.
- Continuing claims for the week ending January 9 were lower than expected, falling by 56,000 to 2.208 million (consensus 2.252 million).
- The four-week moving average for continuing claims increased by 3,250 to 2.228 million.
- The Philadelphia Fed Index for January checked in at -3.5 versus -10.2 in December. (consensus -4.0).
- While the headline number was better than expected, it still doesn't qualify as good considering a number below zero still connotes a contraction in manufacturing conditions.
- The diffusion index for future general activity fell from a revised reading of 24.1 for December to 19.1 for January. In other words, confidence in the outlook is still positive but weakening.
- The business outlook survey for January, the improvement was driven by the shipments index, which moved from a contractionary reading of -2.1 for December to an expansionary reading of 9.6 for January.
Tomorrow's economic data will include December Existing Home Sales (consensus 5.12 million) and December Leading Indicators (consensus -0.1%) with both set to cross the wires at 10:00 ET.
- Russell 2000 -12.1% YTD
- Nasdaq -10.7% YTD
- Dow Jones -8.9% YTD
- S&P 500 -8.6% YTD
South32 debt reduction adds to speculation that it will pursue buys
South32 [ASX: S32] has added to speculation that it will pursue acquisitions by further reducing its debt, the Australian reported on Friday, 22 January.
According to the newspaper, South32 said yesterday that it had cut net debt by USD 81m to USD 115m in the last three months. The net debt stood at USD 400m at the start of the financial year.
The daily said South32 has been stated as a potential buyer for assets in the past year.
South32 said its strong balance sheet differentiated it from others and that it was committed to retaining its investment grade credit rating.
It is expected to completely wipe out its debt by the end of the financial year.
South32 was recently reported to be interested in Anglo American’s niobium and phosphate business in Brazil.
The Australian
Western Digital shareholders supportive of SanDisk deal; Unisplendour committed on stake investment
Western Digital (NASDAQ: WDC) investors are supportive of the proposed acquisition of SanDisk (NASDAQ:SNDK) despite the recent stock plunge and uncertainties surrounding the stake investment from Unisplendour, said four Western Digital shareholders.
On 21 October, the Irvine, California-based maker of hard-disk drives (HDD) announced it would acquire SanDisk, the Milpitas, California-based flash memory chip provider, in a cash-and-stock transaction valued at approximately USD 19bn.
The cash component used to fund the acquisition is contingent on whether Western Digital can secure a USD 3.78bn equity investment from Unisplendour. The China-based company agreed to purchase newly issued Western Digital common stock at a price of USD 92.50 per share.
However, Western Digital’s shares have tumbled about 24% since the beginning of the year, extending its decline of almost 40% since the SanDisk deal announcement. Shares are currently trading around USD 44.00.
A person close to Unisplendour said the company has signed a binding agreement with Western Digital, in which the purchase price had been set. Unless the two companies have any new agreement on stake purchase price through negotiation, the price would not be changed and Unisplendour is committed to complete the deal, this person noted.
The person added that he is not aware of any negotiations to reset the purchasing price.
Hypothetically, if the Unisplendour investment falls apart, Western Digital will need shareholder approval to issue shares required to fund the SanDisk acquisition. Three of the shareholders interviewed by this news service are confident that the vote will come through.
The process of receiving shareholder approval will likely require a better explanation of the synergies in the transaction, the first shareholder said, “I think shareholders will find it very compelling.”
Western Digital is buying SanDisk below the replacement cost of the foundry, and it could not build the foundry without SanDisk’s intellectual properties, this first shareholder continued.
Buying SanDisk is a natural hedge on the declining hard-disk drive business which is being replaced by solid-state drives, the second shareholder said. Vertically integrating NAND flash supply will save the company 20% on gross margin, he added.
Western Digital needs SanDisk, which has state-of-the art technology when compared to Micron (NASDAQ:MU), another major memory chip maker, the third shareholder said. Micron produces random-access memory, flash memory and solid-state drives.
Shareholders referred to the declining stock price of Seagate (NASDAQ: STX), a rival hard-disk drive provider, and the sharp fall of many PC-exposed stocks in the face of weak demand as signs that the market is not punishing Western Digital for the acquisition.
A fourth shareholder, who is supportive of the transaction, did express some concerns that Western Digital could have done a better job negotiating the deal, noting that the acquisition of SanDisk is very expensive.
SanDisk is also facing other risks and uncertainties, including the upcoming expiration of the cross-licensing agreement with Samsung Electronics in August, as well as the lagging effort with Toshiba to develop 3D NAND, a SanDisk shareholder said.