With crude continuing to fall and a $6.5bn loss and job cuts at BP, resource companies are leading the market lower again.
Fears about a global slowdown have re-emerged, with disappointing manufacturing data on Monday from China, Europe and the US. That has helped push oil prices lower again, as has the lack of any progress from Opec and others on cutting production to stem the supply glut.
But with the FTSE 100 falling below 6000 again, there are some bright spots.
Hikma is 60p or nearly 3% higher at £20.89 after a positive note on the pharmaceutical group from Bank of America/Merrill Lynch. The bank has moved from neutral to buy, saying there should be substantial benefits from its purchase of Roxane Laboratories. It expected the company to shut either its own or Roxane’s US generics manufacturing plant.
Sainsbury has added 7.9p to 252.5p following confirmation of its £1.3bn offer for Argos owner Home Retail Group, 0.9p better at 153.8p.
The dominant factor in the market so far however is once again the commodity sector.
The FTSE 100 is down 87.03 points at 5973.07, with BP leading the fallers with a 26.65p or 7% slump to 340.30p after its disappointing results. Poor UK construction data has not helped sentiment.
With Brent crude down 1.5% at $33.71, BHP Billiton is down 37.6p at 640.5p. Anglo American has fallen 12.7p to 261.35p and Rio Tinto is 64.5p lower at 1631.5p. BHP has not been helped by Standard & Poor’s cutting its rating from A+ to A and placed the mining group on negative watch due to challenging conditions for iron ore, oil and copper prices.
Among the mid-caps, Tullow Oil is down 10.4p at 160.8p after Nomura cut its price target from 185p to 150p. The bank’s analysts said:
We maintain a reduce rating for the following reasons: 1) we see the valuation risk-reward on a mid-cycle oil price range of $60-$70 a barrel as not particularly compelling (downside of 40% versus upside of 15%) in the context of weaker near-term prices and our bearish industry outlook...; 2) the high reinvestment risk and large contribution of East Africa to our net asset value (94p on $60 a barrel); and 3) the perception that reducing the debt balance (around $4.9bn for 2016 on $30 a barrel) will squeeze equity value as investments are reduced or deferred.
Short-term, the focus remains on managing the balance sheet. Our estimates suggest that debt covenants will come under pressure through 2016 with net debt at 5-6 times EBITDAX [earnings before interest, taxes, depreciation, amortization and exploration] assuming $30-40 a barrel, even with the benefits of around $600m hedging gain. Although we expect lending banks to be flexible through 2016/17, we see cost reduction, the delivery of first oil at TEN [offshore Ghana] and asset sales as necessary to deleverage meaningfully in the near term.
But TalkTalk is up 17.6p at 235.5p as the telecoms group reported reassuring results after last year’s cyber attack.
