Breakingviews - Corona Capital: Chevron, Boeing, OPEC, Orange

NEW YORK/LONDON/MELBOURNE/MILAN (Reuters Breakingviews) - Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant


- Chevron trims

- Boeing lifts off

- OPEC’s truce

- Orange’s squeeze

OLDER AND POORER. Chevron’s announcement on Thursday that it would again slash investment is as much about oil’s waning prospects as it is about reduced demand because of Covid-19.

America’s most valuable fossil fuel firm will spend between $14 billion and $16 billion annually through 2025, compared to its previous guidance of $19 billion to $22 billion. That’s relatively pessimistic, as the pandemic will be long ended by then. In contrast, Exxon Mobil said on Monday it was slashing capital spending next year, but by 2025 investment could be more than $23 billion.

Put simply, Chevron is adjusting its expectations faster to a world where green alternatives take a bigger chunk of the pie from conventional fuels. Notably, the firm says it will prioritize investments with higher returns and lower carbon. That at least shows more discipline than its largest U.S.-based rival in an industry where the future looks increasingly bleak. (By Robert Cyran)

WINDS OF CHANGE. Ryanair is hopeful the Covid-19 pandemic will be ending sooner rather than later. Europe’s largest airline boosted its 737 MAX order from Boeing to 210, adding 75 aircraft, the U.S.-based manufacturer said on Thursday. It was the largest order since the MAX was grounded nearly two years ago following fatal crashes. That sent Boeing’s shares up more than 7%.

Yet plane deliveries typically take years, so it’s probably not a sign of travel immediately bouncing back. And if Ryanair proves to have been too ambitious, it can prolong delivery and payment to Boeing.

Still, it is a step in the right direction. Boeing has just six quarters of cash based on its most recent burn rate. Not only does this get the manufacturing wheels turning faster, it also shows a vote of confidence for the MAX. For Boeing, both can’t come soon enough. (By Lauren Silva Laughlin)

NO-SCORE DRAW. The Organization of the Petroleum Exporting Countries has quit squabbling. A couple of days later than expected, oil producers and unofficial allies like Russia have struck a deal. But instead of continuing 7.7 million barrels of daily oil production cuts until March, they will only now do 7.2 million, starting in January.

With Brent prices slightly up on Thursday, this is hardly a disaster on the scale of March’s stand-off between Russia and Saudi Arabia. As virus vaccines get rolled out, increasing demand could offset next month’s small supply hike. Prices might then go up rather than down.

Still de-facto OPEC leader Saudi, who wanted to maintain the status quo, has in the past been able to rely on the United Arab Emirates, another big producer, to follow its supply-cutting lead. This time, the UAE and others wanted to hike production. If U.S. drillers start pumping away as prices recover, maintaining OPEC discipline could get even harder. (By George Hay)

ORANGE JUICE. Stéphane Richard is putting a 2.2 billion euro tax windfall from France to good use in Belgium. The chief executive of Paris-based telecoms giant Orange wants to spend 620 million euros of the loot buying out minority shareholders in its Brussels-listed subsidiary, the company said on Wednesday. Although the 36% premium looks generous, the Belgian outfit’s Covid-infected valuation still makes for a fruitful acquisition.

Richard’s bid gives Orange Belgium an enterprise value of nearly 1.6 billion euros, including its estimated 274 million euros of debt. That’s less than 5 times this year’s EBITDA. By contrast, Franco-Israeli tycoon Patrick Drahi copped flak in September for offering 6 times to de-list French rival Altice Europe from Amsterdam. Yet Richard’s premium means he may avoid similar gibes. His offer is 7% above Orange Belgium’s pre-Covid share price in February. Drahi’s was a 40% discount. Orange’s squeeze-out is unlikely to leave such a bitter taste. (By Ed Cropley)

A CREDIT TO FRANCE. Valery Giscard d’Estaing, who died on Wednesday aged 94 due to complications arising from the coronavirus, was a former fighter in the French resistance against the Nazis and winner of the 1974 presidential election by a whisker against his Socialist rival Francois Mitterrand. He also augmented the lexicon of finance. Giscard coined the phrase “exorbitant privilege” to describe the benefit the United States gained from holding the international reserve currency.

Although domestically renowned as a conservative with liberal social instincts, he also became synonymous with launching bonds indexed to the gold price. These were immortalised in Tom Wolfe’s “The Bonfire of the Vanities”, where they help precipitate the fall of alpha male trader Sherman McCoy, who tries to corner the market in “Giscards” before facing huge losses. In fact, it was real-life investors who won out, as the price of gold shot up during an era of high inflation, making them much more expensive for the government to repay. (By Christopher Thompson)

WORTH A FLUTTER. Peter Jackson, chief executive of Irish gambling group Flutter Entertainment, is doubling down on the burgeoning American sports-betting market. The $32 billion Dublin-based group announced on Thursday that it would buy an additional 37.2% of FanDuel for almost $4.2 billion, taking its holding in the U.S. fantasy-sports group to 95%. The stake’s current owner, Fastball, will get about $2.1 billion in cash and the rest in Flutter shares.

It’s a good bet. The implied $11.2 billion enterprise value is roughly 13 times forward sales, compared with close peer Draftkings’ multiple of over 20, using Refintiv data. Jackson was able to squeeze minority shareholder Fastball on price because its controlling stake meant there were no other realistic buyers. Flutter’s shares rose 11% after the announcement. Its odds of U.S. success look good. (By Liam Proud)

OFFICE RECOVERY. The remote-working boom may be running out of steam. Although the most recent lockdown saw more people working from the comfort of their home than during the first round of confinements, Morgan Stanley analysts reckon demand for working from home has declined during the pandemic. In August, surveyed workers in the United Kingdom, France, Germany, Italy and Spain said they would like to work more than two days a week from home. That has now declined to two days in each country.

The results could be a boon to office stocks. Great Portland Estates has enjoyed a 36% share-price bump since September on the back of vaccine hopes. They could have even further to go. Paris and London stocks are trading at less than a 20% discount to the gross value of their assets, having recovered from discounts of near 30% last month. If workers stage a mass return to offices, the valuation gap will tighten. (By Aimee Donnellan)

TAKE WING. Qantas Airways is offering some hope to shareholders and fellow airlines. The $7.7 billion Australian carrier said on Thursday that reopened local borders would help it utilise 68% of its domestic capacity this month, up from 20% earlier in the year. What’s more, boss Alan Joyce expects his company to break even at the underlying EBITDA level in the first half through December.

Such developments will make it the envy of many peers, some of which are still raising capital to cope with the pandemic. Qantas has its hurdles, though. Revenue this financial year stands to shrink by $8 billion compared to pre-Covid times. And although it has retained its investment-grade credit rating, net debt has swollen by a quarter to $4.4 billion. Joyce also expects international travel to be grounded until at least June. All things considered, though, he is on a comparatively better trajectory. (By Jeffrey Goldfarb)

FLYING ON FUMES. Like the pilot of a doomed aircraft frantically tapping the fuel gauge, Norwegian Air Shuttle may finally have run out of financial gas. The once high-flying transatlantic budget carrier, now worth just $140 million, hopes to keep airborne by swapping another chunk of debt for equity and raising $450 million by selling new shares. More state aid might be needed beyond the $292 million injected in May.

It’s hard to see creditors or the government signing up. Oslo has already said it won’t be writing any more cheques. And Norwegian’s current shareholders are the creditors, mainly leasing firms, who agreed a $4.3 billion debt-equity swap six months ago. Asking them to wipe themselves out in return for almost worthless shares and another cash call doesn’t sound like fun. An asset fire-sale will only give creditors a fraction of what they are owed. But it’s better than clambering aboard a flying money pit. (By Ed Cropley)

PANDEMIC SLOG. The China factor won’t immediately save the luxury sector from its pandemic misery. Frantic domestic buying by Middle Kingdom shoppers has put a patch on sliding revenue at heavyweights such as LVMH and Kering, third-quarter results showed. Chinese travelling – a source of retail spending – has already recovered domestically. Yet a global recuperation will take time, McKinsey’s annual report on the state of fashion shows. International tourism could remain subdued until 2024 after a likely 80% contraction this year, the report says.

Chinese bling shopping will continue to boom in 2021 and could be up to 30% higher than in 2019. But global luxury sales will still be between $40 billion and $80 billion below pre-pandemic levels next year, says McKinsey. A complete global recovery could come as late as the fourth quarter of 2022, with Europe not returning to 2019 levels until 2023. The severity of the virus hit requires a commensurately long convalescence. (By Lisa Jucca)

HEDGE GROW. Bill Ackman’s pandemic trades have helped propel him to the top of UK corporate society. The hedge fund manager’s prescient bets against corporate credit ahead of the lockdown crisis have helped lift his London-listed fund’s net asset value by 63% this year. That has propelled it into the benchmark FTSE 100 Index, brushing shoulders with stalwarts such as Barclays and Diageo.

It has been a long trip for the 4.8 billion pound Pershing Square Holdings. It originally listed on Euronext Amsterdam in 2014, and three years later joined the London Stock Exchange in a bid to boost liquidity. Now that it is in the big league, PSH should get an extra kick as index-tracking funds pile in. That may help close its roughly 20% discount to net asset value. Sometimes, index funds can be an active manager’s friend. (By Neil Unmack)


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