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Commodity rout taking its toll

Published Tuesday, September 29th, 2015

With all the warnings around of bubbles close to maturing and bubbles still developing is it easy to forget that we are right in the middle of an enormous one that has already burst. We were reminded of that yesterday and of fallout and damage a burst can do when it comes.

Glencore is a fully fledged commodity play. It has never pretended to be anything else. In 2011 it was an exciting investment at 530p per share. Yesterday it lost another 30% to 68.62p after an analyst warned that if commodity prices do not improve over the next 2/3 years the company will struggle with its debt burden.

Glencore was far from alone in the fallout. Shell announced the abandonment of its Artic drilling plans, a steel plant in the North of England was mothballed with the loss of 1,700 jobs and oil services giant Petrofac shares are half of the value they were two years ago. There is talk of 65,000 jobs to be lost in the North Sea and the Saudi Monetary Authority is rumoured to have removed $50 to $70 billion of assets from fund managers in the last six months to top up its reserves. Total took a scythe to capital expenditure last week and shale oil producers face a difficult autumn funding round although signals to date have been more encouraging than expected.

The days when companies were valued on their oil reserve count are confined to history. It is not that long ago that Shell were downgraded for a misleading reserve count. Now companies are judged not on barrels in the ground but whether they can preserve their dividend. How do you value reserves in such a climate? Do you use $40, $50 or $60/bbl? There is a fair chance that either $40/bbl will be too high or $60/bbl too low. Are they worth anything at all if it costs more than the valuation price to get the barrels out of the ground?

to read the rest of the report, please click here

Posted by David Hufton