Overseas Market Report – U.S. Stocks Rise on ECB Stimulus Hint, Earnings
U.S. stocks rose on Thursday on the back of some better-than-expected earnings and signs that the European Central Bank may embark on further stimulus measures.
As expected, the ECB kept its monetary unchanged. In his comments, ECB head Mario Draghi said the Eurozone is likely to keep feeling the impact of the slowdown in emerging markets. In light of this, he said the bank would need to reconsider the size of its monetary stimulus at its December meeting.
Initial U.S. unemployment claims rose by 3,000 to 259,000 last week. The less volatile four-week moving average was down by 2,000 to 263,250, the lowest level since 1973.
Existing U.S. home sales rose 4.7% in September to a seasonally adjusted annual rate of 5.55 million, the second-highest level since the start of the recession and well above analyst expectations.
At the close, the Dow was up 1.9%, while the S&P 500 and NASDAQ were each around 1.7% higher.
For Australian ADRs listed on the NYSE, BHP Billiton added 69 cents (1.99%) to $35.39, ResMed fell 71 cents (1.26%) to $55.50, Telstra Corporation lifted 39 cents (2.00%) to $19.88, Spark New Zealand gained 35 cents (3.21%) to $11.09 and Westpac rose 67 cents (3.03%) to $22.78.
At 7:45 AM (AEDT), the 10-year Treasury note yield was 2.03% and the 5-year yield was 1.35%.
Shares of McDonald's (MCD) were up after the firm reported better-than-expected quarterly results. The company said same-store sales were up 0.9% in the U.S. during the quarter, the first increase in two years and well above the 0.2% decline expected by analysts. Growth was higher in established non-US markets with same-store sales growing 4.6%. Operating profits were off 2% year over year.
Caterpillar (CAT) reported a 64% year-over-year decline in third-quarter earnings and also cut its full-year outlook. The heavy equipment manufacturing is under pressure as falling commodity prices reduce demand from key mining and energy customers.
Eli Lilly (LLY) said its adjusted earnings rose to 89 cents per share in the third quarter from 73 cents a share in the year-ago quarter. The firm's animal health business and new drugs were key drivers of growth in the quarter. Management also raised its full-year earnings guidance.
Shares of 3M (MMM) were up after the firm reported better-than-expected results, but also announced layoffs. In the quarter, overall earnings were down slightly but earnings per share rose to $2.05 from $1.98 in the year-ago-quarter due to buybacks. In the face of slowing global growth, the firm is planning on incurring a $100-million charge as it lays off 1,500 workers.
eBay (EBAY) shares jumped after the firm's third-quarter update–its first as a stand-alone company, following the separation from PayPal in July–featured several positives, including progress on structured data initiatives, better-than-anticipated constant-currency gross merchandise volume, or GMV, growth of 6% (7% internationally), and almost $600 million in share repurchases.
American Express' (AXP) shares slumped after the firm reported quarterly results. As the loss of its Costco cobrand customers approaches, American Express is boosting spending to offset the loss. Furthermore, the company is facing a tough competitive environment in the rewards space–though much of American Express' cost increase stemmed from recent cobrand renegotiations–and is experiencing foreign exchange headwinds as a result of the strengthening dollar. Basic cards in force grew by 5% over the past twelve months, while average spending per cardholder increased by 2%, adjusted for foreign currency. Credit quality remains exceptionally benign, with only 1% of loans more than 30 days past due at the end of the quarter.
European markets moved higher after Draghi's stimulus comments.
The FTSE 100, French CAC 40 and Germany's DAX were up 0.4%, 2.3% and 2.5%, respectively.
Asian shares finished mixed.
The Shanghai Composite rose 1.5%, while the Nikkei 225 and Hang Seng were each off 0.6%. India's Sensex fell 0.1%.
Australian Market Report – Local Market Expected To Open Higher
Ahead of the local open, SPI futures were 78 points higher at 5,310.
Thursday 22 October – close. Local stocks opened lower this morning, following losses from Wall Street and weakness in commodity prices overnight. The local share market eked out a gain in the last minutes of trade, with energy companies leading the way. The index heavyweight Santos posted double-digit gains after it rejected a $7.1 billion takeover bid, while the big four banks closed modestly higher. There were mixed results from the sectors; energy gained most significantly while materials lagged behind the rest. The Australian dollar depreciated against most major currencies.
The All Ordinaries added 13.10 points to 5,299.60 while the S&P/ASX 200 rose 15.50 points to 5,263.80.
Wesfarmers announced its retail sales results for the first quarter of the FY2016. Headline food and liquor sales for the first quarter were $7.6bn, up 4.7% on the pcp. Comparable food and liquor store sales increased 3.6% and comparable food store sales increased 4.0% for the quarter. Coles recorded food and liquor price deflation of 1.3% during the quarter, the strongest level of quarterly deflation recorded in 2 years. Coles Express sales, including fuel, for the quarter were $1.8bn, a decrease of 7.8% on the pcp driven by lower fuel prices. For the quarter, headline fuel volumes increased 1.4% and comparable fuel volumes decreased 1.8% despite increased investment in fuel offers. Total sales for the quarter were $2.5bn, up 11.6% on the pcp. WES added 22 cents to $40.92.
Argonaut Thought of the Day – How STO opportunistic offer happened
Santos (STO) announced on Thursday that it received an indicative, highly conditional and non-binding proposal from Scepter Partners (Scepter), on behalf of the managed funds of its core stakeholders, to acquire all of Santos for a cash consideration of A$6.88/sh (proposal) ~A$7.1b. It is the first time since 1970 that STO was under takeover offer, then by well-known businessman, Alan Bond, who was blocked when the South Australian government, which in 1979 put in a 15% shareholder cap to stop Bond from taking over vital Cooper Basin oil and gas assets.
Scepter's offer represented a 30% premium to the price at Tuesday's close and is the latest chapter in the ongoing merger/acquisition movement in the energy sector. Since the slump in oil prices Royal Dutch Shell PLC agreed to buy BG Group PLC in April for US$70 billion and Oil Search Ltd. rebuffed Woodside petroleum (WPL) script takeover bid at A$11.6 billion. The STO Board rejected the offer, considering it as opportunistic and not reflecting the fair underlying asset value of the company. Apparently the proposal was also subject to numerous conditions, some of which would be adverse to Santos’ continued evaluation of other alternatives in its current strategic review process.
Who are Scepter
Scepter Partners has its head office in Bermuda, but also has offices in New York and Hong Kong. The Chairman of the Scepter board is Prince Abdul Ali Yil Kabier, a scion of the royal family of Brunei, and other directors include the United Arab Emirates's Sheik Juma Al Maktoum.
The Circumstances leading to this “opportunistic” bid.
It would be fair to say that the circumstances that led up to yesterday’s bid all started on the fateful day that STO announced Final Investment Decision (FID) on US$16 billion 2-train 7.8 mmtpa project.
At the FID point, there were a few things that the market was unaware of with the GLNG project:
1) Due to Coal Bed Methane (CBM) to LNG never being done before, the market did not appreciate for the lifetime of the project an estimated ~9,000 wells were required just for GLNG project delivery
2) Due to the small recovery factors of CBM wells, drilling would be an ongoing capex item throughout the lifetime of the project, which is in stark contrast to traditional LNG projects were the ~80% of the capital costs are spend before production
3) STO did not have enough gas reserves in ground for 7.8mmt/pa for 20 years (generally the economic lifecycle of LNG plants)
4) The $16b cost quoted was only “pre risked first start up (RFSU)” and not lifecycle capex
5) The market did not assume that the three Curtis island LNG projects (QCLNG, GLNG, and APLNG), which were being built next to each other (and at similar times) would not share infrastructure (i.e. jetties, dredging) and therefore costs
6) The sharp slump in the oil price occurring just as STO completed its capital spending of $US18.5 billion ($A25.5 billion) with production to commence
7) The level of debt STO would have on the Balance Sheet post GLNG start up was (~A$8.6b), Net debt (A$8.2m)
Performance of GLNG
Whilst STO has announced recently that the GLNG project has shipped first gas, it has to be said that the project was not within budget, particularly taking into account the US$2.5 billion cost "acceleration" along with about A$2.5 billion in "non-project" capital expenditure over the initial A$16b cost estimate. Also there is still questions surrounding the availability of reserves.
Oil price movement
Perhaps, singularly the most important variable that affected STO was the adverse move in oil price that began the year before GLNG was set to commence production. During FID, STO touted the benefit that the LNG was sold on oil linked contracts. As the price of oil fell, so did the STO’s valuation.
Whilst the falling oil price hurt the entire sector, STO was particularly affected due to the diminishing revenues expected from GLNG (and the rest of its assets), which called into question its ability to pay the A$8b. The knock on effect of this was that the market anticipated a capital raising which further depressed the share price.
Strategic review on-going
Santos announced on 21 August 2015 that it would conduct a thorough strategic review of all options to restore and maximise shareholder value. Which essentially put all the assets of STO up for sale. The strategic review is ongoing, and STO continue to consider all proposals which deliver appropriate value and certainty for shareholders. Santos will continue to inform shareholders of any material developments.
The likely hood of another bid seems high
Post the bid announcement, STO increased 16% to A$6.32. We believe that a revised bid is possible, particularly looking at the party involved and its financial backing. Should a revised offer of A$7.00 or above cash be made, we view it would be difficult for STO to reject.
Recent Contacts & Presentations
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