Berkshire Hathaway boosts Phillips stake

BY Richard Summerfield

Fresh on the heels of the firm’s $32bn acquisition of Precisions Castparts, Berkshire Hathaway has announced that is has a taken a $4.48bn stake in oil refiner Phillips 66, making it the company’s biggest shareholder.

According to a filing made with the US Securities and Exchange Commission on Friday evening, Berkshire has amassed a 57.98 million share, or 10.8 percent stake in the company. The move marks a return to the business after divesting two-thirds of its stake last February.

In 2014, Berkshire traded a significant portion of its stake in the Phillips 66 unit for a chemical-business investment which was subsequently absorbed by Berkshire’s Lubrizol division.

However, Berkshire is believed to have begun rebuilding its holding in Phillips 66 in the second quarter of 2015, when it bought $3.09bn worth of equities in the firm. As a result of the conglomerates announcement, Phillips shares closed Friday at $77.23.

Since Berkshire traded away the majority of its holding in Phillips, the firm has continued to blossom. Since the spinoff, Phillips stock has more than doubled in value.

Berkshire’s disclosure underlines its belief that the energy sector is likely to be a growth area. This is Berkshire’s most significant energy investment in around two years, though it only represents a mid range investment by Berkshire’s standards. The conglomerate, which has a diverse portfolio of over 80 firms, typically takes much larger holdings, including $20bn stakes in Wells Fargo & Co. and Kraft Heinz Co. The firm also has a $10bn holding in Coca Cola and IBM.

Berkshire hopes that low oil prices will continue to drive demand for gasoline, diesel and other petroleum products. This demand has been ably demonstrated in the US over the last 12 months; since prices began to tumble last year, gasoline demand in the US has climbed to an eight year high. Following the company’s outlay in Phillips 66, Berkshire will hope this demand continues to grow.

News: Buffett's Berkshire takes $4.48 billion stake in Phillips 66

Schlumberger and Cameron agree $14.8bn merger

BY Richard Summerfield

Given the current volatility in commodities, it is little surprise that we are beginning to see more M&A activity in the oil and gas space. To that end, Schlumberger Ltd announced this week its agreement to acquire Cameron International Corp in a deal worth around $14.8bn, including the assumption of debt.

Under the terms of the deal, Cameron shareholders will receive 0.716 Schlumberger shares and a cash payment of $14.44. According to a statement released by the two firms, the agreement places a value of $66.36 per Cameron share, a premium of 37 percent to Cameron’s 20 day volume weighted average price of $48.45 per share. The deal has been approved by the board of directors at both firms. Pending shareholder, regulatory and other closing conditions, the transaction is expected to close in the first quarter of 2016.

Regulatory approval could pose an issue for the two companies. In November, Schlumberger's two closest rivals - Halliburton Co and Baker Hughes Inc - agreed to merge in an effort to lower costs in a pressurised market, but the deal was blocked by antitrust authorities in the US. However, the fact that there is little crossover between the services offered by Schlumberger and Cameron may allay any regulatory concerns.

The acquisition of Cameron is an important one for Schlumberger, given the company’s standing as one of the world’s largest producers of energy equipment. In the statement, Paal Kibsgaard, chairman and chief executive of Schlumberger, noted, “This agreement with Cameron opens new and broader opportunities for Schlumberger. At our investor conference in June 2014, we highlighted how the E&P industry must transform to deliver increased performance at a time of range-bound commodity prices. With oil prices now at lower levels, oilfield services companies that deliver innovative technology and greater integration while improving efficiency, which our customers increasingly demand, will outperform the market.”

The proposed merger of the two companies is not the first time they have been associated. In 2012 the firms established a joint venture – OneSubsea - to target the deepwater industry. OneSubsea is a supplier of heavy duty machinery which allows Big Oil firms to control the flows of oil and gas they find and bring it to the surface.

The acquisition of Cameron is expected to help Schlumberger achieve significant synergies, by lowering operating costs, streamlining supply chains and improving manufacturing processes.

Jack Moore, chairman and chief executive of Cameron, said, “This exciting transaction builds on our successful partnership with Schlumberger on OneSubsea and will position Cameron for its next phase of growth. For our shareholders, this combination provides significant value, while also enabling them to own a meaningful share of Schlumberger. Together, we will create a premier oilfield equipment and service company with an integrated and expanded platform to drive accelerated growth. By bringing together Cameron and Schlumberger, we will be uniting two great companies with successful track records, performance and value creation.  We look forward to working closely with Schlumberger to achieve a seamless post-closing integration and long term value for all of our stakeholders.”

News: Schlumberger to buy oilfield gear maker Cameron in $14.8bn deal

$1 trillion wiped from Asian markets as Chinese economic slowdown verges on meltdown

BY Fraser Tennant

In a major drop in stocks verging on a meltdown, more than $1 trillion has been wiped from Asian markets following a sharp drop in the value of Chinese shares.

Yesterday saw the biggest one-day drop since 2007 with the Shanghai Composite, the mainland benchmark index, down 8.5 percent at 3,209.91 points (erasing all the gains made this year), the Hong Kong Seng index closed at 5.2 percent (21,251.57 points), and Japan's Nikkei 225 (the region's biggest stock market), closed 4.6 percent lower (18,540.68 points) - its lowest point in almost five months.

Markets were also dragged down elsewhere in the region with the Australian S&P/ASX 200 finished 4.1 percent lower (5,001.30 points), while South Korea's Kospi index ended yesterday 2.5 percent lower (1,829.81 points).

As Chinese shares continue their fall this week, the country's slowing growth and volatile markets sparked panic among global traders, with stock markets in London, Paris and Frankfurt reacting with alarm to the crisis engulfing the world's second largest economy.

"It is a China driven macro panic," said Didier Duret, chief investment officer at ABN Amro. "Volatility will persist until we see better data there or strong policy action through forceful monetary easing."

In a frenzied attempt to reassure investors, the Beijing government has made use of its cash reserves to shore up the market (a figure of at least $1 trillion as been quoted) and has given the go-ahead for its main state pension fund to invest in the stock market. 

Under the government’s plans, the fund will be allowed to invest up to 30 percent of its net assets in domestically-listed shares. By increasing demand for them, the government hopes prices will rise. So far though, this intervention appears to have done little to calm the fears of traders both within China and overseas. 

"China could be forced to devalue the yuan even more, should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy," said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.

If the yuan is devalued further and Chinese citizens end up losing their life savings in the stock market, widespread social unrest may follow: a true nightmare scenario for a an under-fire Beijing government. 

News: Great fall of China sinks world stocks, dollar tumbles

‘Abenomics’ under fire once more as Q2 GDP data confirms weak Japanese economy

BY Fraser Tennant

Second-quarter GDP figures have confirmed that the Japanese economy,  the world’s third-largest, shrank at an annualised pace of 1.6 percent – a contraction that keeps up the pressure on prime minister Shinzo Abe and his economic policy package, Abenomics.

According to data released this week by the Cabinet Office, on a quarter-on-quarter basis, Japan’s gross domestic product contracted 0.4 percent in the April to June 2015 period. Economists surveyed by The Wall Street Journal forecast a 0.5 percent contraction (1.9 percent annualised).

Despite the weak economic growth, the Japanese economy actually expanded over the previous two quarters, although that expansion followed two quarters of contraction.

A slump in overseas demand for Japanese goods and more frugal attitudes toward household expenditure have been cited as the major reasons for the stagnating Japanese economy.

As well as essentially confirming that its economy is at standstill, the austere Japanese GDP data also steps up the pressure on senior policymakers to devise a fresh monetary/fiscal stimulus to bolster the economy and reverse decades of deflation.

Since taking office in December 2012, prime minister Abe has struggled to bolster economic growth, with his audacious Abenomics revival program so far failing to turn the Japanese economy around.

Commenting on the Cabinet Office figures, economics minister Akira Amari stated that the government did not have any concrete plans as yet to introduce a new stimulus package but would concentrate for the moment on pressuring companies to direct their profits toward raising wages and capital expenditure.

Responding to Mr Amari’s view, Hiromichi Shirakawa, chief Japan economist at Credit Suisse, said: “If weak private consumption persists, that would be a further blow to Abe's administration, which is facing falling support rates ahead of next year's Upper House election. This could raise chances of additional fiscal stimulus."

Although economists do expect economic growth to pick up in Japan in the second half of 2015, for now there is considerable pressure mounting on prime minister Abe and his government to take steps to boost the economy, sooner rather than later.

News: Japan economy shrinks in second quarter in setback for 'Abenomics'

Banks in latest $2bn FOREX settlement

BY Richard Summerfield

Nine major world banks have agreed to pay a $2bn settlement to conclude a class action brought in a New York court over the recent foreign exchange rigging (FOREX) scandal.

For the banks involved, the ramifications of rigging the market in their favour continue to mount up, with fines already exceeding the $10bn mark. However, almost as harmful as the fines and settlements has been the damaging effect of the scandal on the reputations of the banks involved.

The firms involved in the FOREX fixing conspiracy, including HSBC, Barclays, BNP Paribas, Bank of America, JP Morgan, Citibank, Goldman Sachs, RBS and UBS, have been pilloried, and heavily sanctioned in recent years for their roles in the scheme. As a result of the FOREX controversy – amid other notable financial scandals – confidence in the wider financial services sector appears to be almost at rock bottom.

In May, five of the banks - Barclays, Citicorp, JPMorgan Chase, Royal Bank of Scotland and UBS - pleaded guilty to felony charges relating to rigging foreign exchange rates. In 2014, the Financial Conduct Authority in the UK fined four of the five firms a total of £1.1bn. The fifth bank, Barclays, is still under investigation.

According to Michael D. Hausfeld, chairman of Hausfeld, a global claims firm acting on behalf of US investors, the most recent settlements are a key victory for those wronged investors. “As a result of lengthy, hard-fought negotiations, we have obtained historic recoveries on behalf of US investors,” wrote Mr Hausfeld. “Apart from the monetary component, each defendant has agreed to provide substantial cooperation, which will assist investors in their continued litigation against the non-settling defendants. While the recoveries here are tremendous, they are just the beginning. Investors around the world should take note of the significant recoveries secured in the United States and recognise that these settlements cover a fraction of the world’s largest financial market," he added.

Furthermore, as part of the settlement, the rebuked firms have agreed to help investors continue their legal action against a further 12 banks - Credit Suisse Group AG, Credit Suisse AG, Credit Suisse Securities, Deutsche Bank AG, Deutsche Bank Securities Inc., Morgan Stanley, Morgan Stanley and Co, Morgan Stanley and Co. International, Bank of Tokyo-Mitsubishi, RBC Capital Markets, Société Générale, and Standard Chartered.

Undoubtedly, the increase in fines and settlements reflects the increasing regulatory scrutiny banking groups have found themselves subject to in recent years. For those targeted banks, the enforcement actions – and settlements - will likely continue for some time.

News: Currency rigging lawsuit settlements rise past $2bn - lawyer