The bombing of Saudi Aramco’s oil-
processing facilities has triggered a
topsy-turvy period for oil markets. Oil
prices have soared, lifting the shares of
neglected energy producers.
Energy stocks, along with financials,
usually fall into the category of
inexpensive equities labelled “value”.
These have long trailed the broader
market. Value fund managers, the
investment world’s underdogs, have
grounds to believe they are now alpha
animals. They should think again.
Value encompasses those shares
trading at low valuation multiples
versus their respective earnings, or
book values, and those offering high
dividend yields. Many oil and gas
companies, such as Chevron and Total
of France, fit this screening.
So do banks. Financials are by far the
largest sector in MSCI’s value index,
with nearly a quarter of the weighting.
Both financials and energy tend to
suffer from relatively low price-to-
book ratios. European banks on this
ratio trade near decade lows. This
means the market has a lower opinion
of these assets than the companies do
themselves. Technology groups have
less shareholder equity, but deliver
higher returns on it.
Integrated oil companies with large
amounts of free cash flow will receive
more attention from now on even if
crude prices only move sideways. Large
European oil producers offer dividend
yields of around 6 per cent.
But without a much steeper bond
yield curve, to lift loan profitability,
expecting a lot more from banks seems
a stretch. Yes, there have been
exceptions, such as JPMorgan and Bank
of America. Their peers in the US and
elsewhere have lagged well behind.
Any hiccup in the bond market,
pushing up yields, tends to attract
value hunters. Unfortunately,
a sharpish sell-off in longer-dated US
Treasury notes this month has now
fizzled out and the value factor usuallyValue funds/oil:
crude calculussprings to life at the early stages of
recovery, not late in an economic cycle.
Value will have its day, just not today.Hong Kong’s rush-hour trains were
delayed by a derailment yesterday. The
timetable for a shake-up of the city’s
banking oligopoly is in chaos too.
Protests are delaying the launch of
eight online banking services, Reuters
reports. The delay provides a respite
for HSBC, Standard Chartered and
their investors. It may be shortlived.
Internet-only lenders represent a
threat to traditional banks. Over 95 per
cent of Hong Kongers have a bankHong Kong banks:
lightning conductorsaccount. HSBC gets its fattest margins
from its retail business there. Fees from
small retail customers add up to large
sums,while those from the investments
of Hong Kong’s wealthy are chunky.
Chinese financial services groups had
been expected to offer a cheaper
service. But protests have deepened
animosity towards China. Many of the
new banks are joint ventures backed by
Chinese businesses. These include
Tencent, Bank of China, and Ant
Financial. Getting customers to make
their financial data accessible to the
Chinese authorities looks like a big ask.
China has a five-year headstart with
virtual banks. Tencent’s WeBank and
Alibaba’s MyBank are profitable and
dominate the online market on the
mainland. A delay in Hong Kong will
do them no harm. But a prolongeddelay would hurt Hongkongers. Retail
customers and small businesses pay
steep charges to the territory’s
established lenders. Not paying Hong
Kong office rents could lower fees and
widen access to credit while still
allowing a profit. HSBC and StanChart
are awkwardly positioned; to retain
access to the mainland market they
must stay neutral on the protests many
staff sympathise with.
The protests could leave the city a lot
more isolated, reducing the value of a
financial services industry accounting
for almost a fifth of the local economy.
Over three-quarters of Chinese already
bank virtually. Singapore is cementing
its status as Asia’s fintech hub.
The risk is that Hong Kong becomes
a station on a sleepy branch line, rather
than a bustling terminus.Former American Airlines president
Scott Kirbyonce derided fuel hedging
as“a rigged game that enriches Wall
Street.” It is a position the company
may want to reconsider after an attack
on two key Saudi Arabian oil facilities
sent crude prices soaring on Monday.
Jet fuel, along with labour, is an
airline’s greatest cost item. During the
oil price rally between 2011-14, when
Brent was averaging about $100 a
barrel, the industry aggressively
hedged fuel costs with swaps and other
financial instruments. When oil
plunged to below $40 a barrel in 2016,
those hedges created big trading losses.
In response some airlines have
stepped back from the practice.
American and United Airlines have
both adopted a no-hedge policy. While
that helped support profits when oil
prices were low, it left the airlines
exposed when Brent rebounded.
Hedging matters. American cut its
full-year earnings guidance this year,
warning that fuel costs will be $650m
higher expected. Delta has about half
ofits fuel needs covered for 2019,
owing largely to a refinery it acquired
in 2012. Southwest Airlines remains an
avid hedger, with 73 per cent of its fuel
needs hedged for the year. The two
stocks — up 18 and 20 per cent
respectively so far this year — have
vastly outperformed their peers.
American’s executives will hope oil
quickly reverses course. The 5 times
forward earnings on which American’s
shares trade suggests otherwise. Its
valuation is half of Southwest’s. Worse,
the grounding of Boeing’s 737 Max
aircraft should result in a $400m hit to
profits this year, the equivalent of over
a tenth of last year’s operating profit.
Airlines do have some room for
manoeuvre. Demand for air travel has
remained robust. Operators could raise
fares to offset fuel-cost pressure; or
they can tighten capacity by cutting
underperforming routes. While the
costs of hedging can at times outweigh
the benefits, it protects airlines against
oil price volatility. That insurance is
worth paying a premium for.US airlines:
hedge hoppingIt can be hard to spot the thread that
connects Amazon’s sprawling business
interests. The high-definition music
streaming service launched yesterday
joins a jumble of ecommerce, freight,
Hollywood movies, cloud computing,
small business loans and supermarkets
in the $895bn company.
Plenty of ideas have fallen by the
wayside over the years, including hotel
booking and smartphones. Any new
product from Amazon tends to be just
one of many small bets.
That means established businesses
need not always feel as terrified of
Amazon as they sometimes seem to.
Take supermarkets. Two years ago,
Amazon spent $13.4bn buying
upmarket US chain Whole Foods,
sparking a share-price fall across the
sector. Never mind that Amazon failed
to expand online grocery delivery. Or
that rivals with bricks and mortar
stores were all trying to work out ways
to sell online. Perhaps, they fretted,
Amazon had a secret plan up its sleeve
to turn physical stores into something
altogether new.
If there is a plan then Amazon has
kept it quiet. There has been no
revolution. Price cuts were not big
enough to expand the demographic of
shoppers. As part of Amazon’s physical
stores unit it reported just 1 per cent
revenue growth in the last quarter from
a year earlier. Cashierless Go
convenience stores, with their
complicated system of videoing users
to track what they take, are more
innovative. Yet these stores are neither
so cheap nor so full of quality produce
that they draw in large crowds. So far
only 16 stores have opened.
There is always the chance that an
Amazon side bet will turn out to be the
next cloud-services business, which
began as an idea to rent out idle servers
and now boasts a 25 per cent operating
margin and contributes more to
operating profit than any other part of
the business.
Then again, it is probably not a good
idea for Amazon to put its full weight
behind supermarkets just as the
Federal Trade Commission steps up an
investigation into market dominance.
For now, antitrust questions are
trained on the online marketplace.
Amazon argues that even if it is a heavy
Amazon/food sales:
perdition postponed
hitter online it represents just a tiny
fraction of total retail sales. Aggressive
price cuts in physical stores are a bad
idea right now. Better to keep digging a
moat around online sales via
investments in logistics and wait.CROSSWORD
No. 16,275 Set by AARDVARK
JOTTER PAD
ACROSS
1 Work in theatre alongside father
and sons (6)
4 Dated model, holding back a state
of excitement (6)
8 Some disturbed by roguish
lawlessness (7)
9 Notice bog close to extractor fan
(7)
11 Perhaps Oliver or Annie scrap
noisy old toy (7,3)
12 Fish and quinoa regularly served
on time (4)
13 Surge of intense activity
brightened boring business, one
conceded (5)
14 Person in audience to record
Frenchman backing (8)
16 Casual golfer welcomes annual
round – jumpers are needed for
this (8)
18 Cry coming from Donald, possibly
a charlatan (5)
20 Wrap up eggs and drive away (4)
21 Abandoned plane, reassembled
on-site, departs (10)
23 Short recording in medical
department that can be seen (7)
24 Diane moved into centre of Bude
by herself (7)
25 Golden castle maybe following
new architectural style (6)
26 Present opening is after this
period (6)DOWN
1 Language graduate not missing
old university (5)2 Curtailed piggy one’s mushrooms
(7)
3 Dog training runs, each involving
an unspecified number (9)
5 Alphabetical registry actually
excluding editor on Times (5)
6 Inform the Catalan about
supporting card game (7)
7 US writer’s drinking vessel
supplied with running water (9)
10 Ex-pupil on bass got Ali to change
musical accompaniment (9)
13 Composer extremely bothersome,
repositioning the heater (9)
15 Dicky needs to dress one of five
kids in sparkly clothing? (9)
17 One moves laboriously outside in
Pontypool, wanting more rum (7)
19 Worry intensely since returning in
London area (7)
21 Project written by American about
new military government (5)
22 Raise stern of frigate reportedly
destroyed (5)127,21$/ 02 /7(
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For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLex
Borat, a comedy Kazakh, once sang a
patriotic ditty extolling the quality of
local potash. Yorkshire folk can no
longer sing along: financing for a
$5bn fertiliser mine has unravelled.
Sirius Minerals blames Brexit,
bond markets and the government.
Hype surrounding the project is more
deserving of criticism.
It is a risky business digging deep
mine shafts and boring a 23-mile
tunnel to take fertiliser to port for
shipment. Yorkshire potash might be
as good as the Kazakh stuff. But the
market for the variety that Sirius
plans to mine — polyhalite — is
poorly developed.
Sirius claims its resource will last a
century, generating $1bn a year of
free cash flow. The Lex headline “Youcannot be Sirius” reflected the mood
among sceptics. The government,
which has jumped the shark in many
respects, has sanely declined to prop
up the project with loan guarantees.
Sirius sought state support only
because a private fundraising was
crumbling. The company could not
place $500m in junk bonds, even at a
sky-high yield of up to 15 per cent.
JPMorgan therefore declined to put up
a $2.5bn revolving credit facility.
With just £117m in uncommitted
cash, Sirius was set to run out of money
in October. Jamming on the project’s
brakes gives the company six months
to devise a Plan B. The likely solution is
to recruit a backer with financial
muscle. A rescuer would want a big
chunk of equity. Sirius shares crashed54 per cent yesterday partly on
dilution fears.
That leaves the group’s market
worth at just over £300m, one-fifth
the peak value recorded a year ago by
S&P Global. Small private
shareholders are the main losers.
Most institutions have given Sirius
a wide berth.
They know how rarely mining
projects succeed in the UK, a densely
populated, highly regulated country.
But it is pertinent to wonder whether
the group will ever achieve “first
polyhalite” — a phrase to stir the
hearts of all Kazakhs and Yorkshire
people.
Yorkshire potash may become a
recurrent promise that, like fresh
Cornwall tin, is never delivered.FT graphic Sources: Refinitiv; S&P CIQ; World Bank; Sirius Minerals * operating cash outflow and capexPolyhalite’s four main nutrients
Per centSulphur
Calcium
Potassium
Magnesium
Fertiliser prices have fallen
Price index Burning cash as patience ebbs
Free cash outflow* (m) v share price- - - - - - - - - - - £m Sirius Minerals (pence)Sirius/Yorkshire mining: boring a la Borat
An ambitious project to mine polyhalite, a chemical fertiliser, is running into trouble. Shares in Sirius Minerals
have dropped steeply. The business, which is burning cash, is struggling to raise fresh funds. Fertiliser prices
have slipped since the early years of this decade.1 2 A F I N A N C I A L T I M E S W e d n e s d a y 1 8 S e p t e m b e r 2 0 1 9
SEPTEMBER 18 2019 Section:FrontBack Time: 17/9/2019 - 18:55 User: joe.russ Page Name: 1BACK, Part,Page,Edition: LON, 14, 1