Oil and resource companies remain under the cosh. It’s an uneasy juxtaposition, as the fall in the oil price should in theory help to boost global growth, which in turn would boost the demand for minerals. Right now I’d be inclined to back resource companies rather than the oil-related sector but either are risky for long term investors like me who are wary of cyclical stocks.
One big question is how far the price of oil will fall. We can ignore the more extreme contracts being struck on the options market for trades as low as $40 a barrel. This is a very cheap and highly speculative play in a specialised market that has more to do with gambling than investing. It won’t happen – and I write as one who remembers when oil hit $40 on the way UP. We shall not see that level again unless the world goes into massive deflation.
More realistic is the indication from Saudi Arabia that the price will bottom out at $60. That really could happen. The Saudis have so far been reluctant to agree to a cutback in OPEC oil quotas. The implication is that they would do so if oil slips towards $60.
The only oil related stock I hold is Royal Dutch Shell (RDSB) and it is still above the price I paid for my stake in a group that has paid decent dividends in the meantime. I will not be topping up my holding at this stage, though. I expect life will get worse for the sector before it gets better.
Autumn Statement Review
I will be brief on the Autumn Statement, a curious mishmash of Budget and electioneering. As speeches go, this one was a cracker in political terms but a damp squib in economic terms because so much was dribbled out beforehand that it lost much of its impact.
I don’t think any of the measures announced will have much effect on the stock market. The national debt remains massive and is still growing alarmingly but it is still funded at very low rates of interest. As we head towards an uncertain general election, keep calm and carry on.
Back to Balfour
The leadership that made such a hash of the takeover approach to construction and infrastructure group Balfour Beatty (BBY) are now mercifully departed but shareholders like myself must hope that the remaining directors plus Leo Quinn, the new chief executive who arrives in January, make a better fist of the current situation.
Balfour scuppered an attractive approach from rival Carillion (CLLN) by senselessly insisting on selling a highly profitable consultancy business in the US to avoid breaching bank covenants, which would not have been an issue in the proposed enlarged group. Now there is an approach from John Laing Infrastructure Group (JLIF) for Balfour’s portfolio of 60 projects financing public schemes.
The opening offer of £1.05 billion has rightly been rejected as far too low but Balfour has, also quite rightly, kept the door open for a higher offer. Balfour cannot afford to let this profitable business go on the cheap as it represents practically the whole stock market value of the group. Any such sale would leave Balfour with a pile of cash but with a portfolio of struggling construction projects.
Balfour really does need Carillion back, although any offer now would be much lower than the previous approach. Unfortunately Carillion is out of the frame, under the Takeover Code rules, for another couple of months unless Balfour invites it back to the table. Quinn should make that his first consideration, even if he risks doing himself out of a job in pretty short order.
