Britain’s Serco shares get boost from upbeat outlook

Serco, which is undergoing an overhaul started three years ago after a series of profit warnings prompted a reset of its strategy, said 2017 revenues would be just under £3 billion. (Reuters)
Updated 13 December 2017
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Britain’s Serco shares get boost from upbeat outlook

EDINBURGH: An upbeat outlook on Wednesday from Serco lifted shares in the British outsourcer, which runs government services in defense, justice, immigration, transport and health, bucking recent pressure on the sector due to political uncertainty.
Serco said strong growth in overseas markets was offsetting slower prospects at home because of Brexit. Combined with cost cutting, this meant its 2017 underlying trading profit would be at the top end of an earlier forecast range.
Although Chief Executive Rupert Soames was positive about the prospects for Serco once Britain’s exit from the EU is decided, he said the pipeline was unpredictable.
“Some markets, and in particular the UK, are currently growing more slowly than their former trend rate,” he said in a statement.
“The (UK) government is incredibly distracted at the moment,” he later told Reuters.
“That’s a threat, but once Brexit is done, the one thing that is absolutely certain is that there is going to be a whole lot more government going on in the UK, and we’re going to have to have different arrangements at borders,” he added.
Soames cited the need to set up new regulatory agencies and new environmental compliance rules as reasons to be more positive on the British market in the future.
Serco, which is undergoing an overhaul started three years ago after a series of profit warnings prompted a reset of its strategy, said 2017 revenues would be just under £3 billion, while it also saw good profit growth in 2018 and 2019.
Shares in the company, which had fallen by nearly 16 percent in the last three months, were up by 5.6 percent to 100.7 pence at 1051 GMT, after earlier rising as much as 13 percent.
Outsourcers have been grappling with global political uncertainty which is hampering the pace of decision-making in the public and private sector and increasing margin pressure.
Serco also announced the purchase of some of the UK health care facilities of debt-laden Carillion for about £47.7 million.
It said the timing of reaching a long-term goal of 5 to 7 percent revenue growth and 5 to 6 percent profit margin would depend on when demand reverted to trend in its target markets.
Soames said Serco was rebalancing its business development budget away from the UK to target other countries but its pipeline of new bid opportunities, currently worth £4 billion to £5 billion, would be “noticeably lower” by the year end.
Serco dropped out of a big Middle Eastern rail contract bid process earlier this year because it was too difficult to predict the level of risk, Soames said.
But its businesses abroad were otherwise performing well, with “green shoots” in its US defense business.


Saudi Arabia seeks stable, not soaring, oil prices

Updated 22 September 2018
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Saudi Arabia seeks stable, not soaring, oil prices

  • Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday.
  • The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98

RIYADH: Oil prices rose this week on continuing market tightness. With the price rise, some Saudi-bashing has begun. Bloomberg reported that increasing prices were due to Saudi Arabia’s comfort with Brent crude above $80 per barrel. Such “analysis” is hogwash.

Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday. WTI rose above $70 per barrel for the first time in three months and settled at $70.78 per barrel by the week closing.
The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98. As may be noted in those numbers, the Brent crude price has been resisting the psychological barrier of $80 per barrel. The fact is that, since October 2014, the Brent monthly average has never gone above $80.
The oil price outlook might be raised as a result of this upward tendency and the continuing tight oil market. For instance, with the latest numbers in hand, HSBC has revised its oil price forecast upward with Brent to average $80 per barrel in 2019 and $85 in 2020, before settling at about $75 in 2021.
Bloomberg was inaccurate about Saudi Arabia’s comfort with a Brent price above $80 per barrel. The Kingdom has never been among the bulls when it comes to oil prices. Again and again, Saudi Arabia has been a major advocate for stable oil prices, not increasing oil prices, which it views as unsustainable and damaging to the global economy. Bloomberg is also predicting that Saudi Arabia will follow its allegedly bullish nature and refrain from ramping up production to compensate for the oil lost once the US sanctions on Iran come into effect.
US Secretary of Energy Rick Perry has confirmed that Saudi Arabia, Russia and the US are well able to add enough crude oil supply into the market to compensate for Iran. Indeed, the Kingdom has begun to increase output to adjust for market needs, from 9.87 million barrels per day (bpd) in April to 10.42 million bpd in August.
The upward movement in oil prices came after strong fundamentals showed market tightness that spurred record levels of speculative traders, with nearly all betting on higher prices. The price rise also recognized that total US inventories are below the five-year average for the first time since May 2014. Oil prices have been gradually trending upward with gentle fluctuations. There have not been any steep surges or declines. There is nothing artificial about the trend. In reality, it is boringly predictable.
Last month, the International Energy Agency (IEA) reported OECD commercial crude oil inventories at 32 million barrels below the five-year average. Stocks at the end of Q2 2018 were up 6.6 million barrels versus the end of 1Q 2018, the first quarterly increase since 1Q 2017. The IEA also noted that global refinery throughputs in the second half of 2018 are expected to be 2 million barrels higher than in the first half of the year. These refined products stocks will draw down before building again in 4Q 2018.
Global crude oil inventories peaked in 2016. The OPEC+ agreement that worked for market balance was the reason for a fall in inventories. Since May 2017, global oil stocks have been on the decline and now global crude oil stocks are below the five-year average. Product stocks are also below that level, with strong demand and healthy refining margins.
Inventories have kept falling despite American producers pumping at all-time highs last month. It is only the massive flood of oil from the US which has kept crude oil prices at low levels from early 2015 to the end of 2017 — along with a resulting lack of upstream investment in the oil industry. Therefore, the IEA predicts that in 2022 spare production capacity will fall to a 14-year low.
Global oil markets are rebalancing. Oil prices started their upward momentum from the end of October 2017. They went above the psychological barrier $60 a barrel after 10 consecutive months of tireless efforts by OPEC and non-OPEC nations that started on January 2017. The market rebalancing will continue through the end of 2018, and beyond.
Such upward momentum in oil prices isn’t artificial movement because it came after many months without steep price fluctuations. In 2016, the Brent price average was $43. The 2017 Brent price average was $54, and prices just surpassed $60 in October 2017. The Brent average surpassed $70 in late March 2018 and has been hovering between $72 and $78 since. There is no evidence of a steep fluctuation or an artificial movement.
The claims of an artificial price movement have come just at the time when OPEC and the world are reaping the positive outcomes of 24 nations collaborating in output cuts that managed to successfully rebalance the oil market in a situation where global oil inventories were running at record highs. Also, these false claims came when the oil industry needs capital inflows to reactivate upstream investments for major international oil companies. Such investments are essential for the price stability that benefits oil producers and consumers globally. Low oil prices result in low investment in discovery and production of petroleum resources, which damages various industry sectors and energy needs. That leads to a vicious cycle of up-and-down price fluctuations.