Monday 13/08/18

  1. In OIL NEWS TODAY, Shell heralds the return of deepwater drilling but frackers are counting the cost
  2. In UK CONSUMER/RETAILER NEWS, Visa and the BRC give us a snapshot of consumer behaviour and Mike Ashley is urged to pay more for House of Fraser
  3. In INDIVIDUAL COMPANY NEWS, Alibaba and Tencent slug it out in food delivery supremacy, Google scopes local partners for China expansion, Saudi Arabia’s PIF eyes Tesla and the administrators for Phones 4U build up a £130m war chest
  4. In OTHER NEWS, I bring you some fast food innovations in burgers and pizza. For more details, read on…



So we see the contrast between old school and new school oil…

In Shell hails bounceback towards deepwater drilling (Financial Times, Anjli Raval) we see that the company’s head of exploration and production, Andy Brown, is getting excited about the prospects of deepwater (projects that involve exploration to depths of over 300m) as it is an area which has suffered from an investment shift in the last few years towards short-cycle output such as US shale fields which have been yielding production faster and cheaper than conventional output. However, Brown argues that the trend is now shifting back as advances have been made in this area and Brown observes that “Deepwater can compete if not demonstrate higher returns because of fundamental cost reduction. Break-even prices in deepwater –  we are now talking $30 per barrel”. Good times.

Meanwhile, Frackers burn cash to sustain US oil boom



(Wall Street Journal, Rebecca Elliott and Bradley Olson) shows that costs are rising for oil frackers as they are having to increase their investment considerably in their bid to scale up. Two-thirds of US oil producers failed to profit in the second quarter despite oil prices rising above $70 per barrel as costs for raw materials such as sand and water (which are used in hydraulic fracking) have shot up due to sky-high demand. The pace of technological improvement in the industry is also slowing down as the chief exec of Laredo Petroleum, Randy Foutch, pointed out “You can’t continue to get 50% better every year. We will get better, but I don’t expect it to be at that kind of rate”. * SO WHAT? * Many observers are now predicting that US oil growth will slow due to higher service costs, less dramatic technological improvements, pipeline bottlenecks in the Permian Basin region and increasing pressure on US producers to put profitability ahead of expansion.  Leigh Goehring, managing partner of Goehring & Rozencwajg, warned that “many companies have promised to live within cash flow and grow by 10% or 20%, and it’s looking more and more like some are going to have to choose between the two. If the Permian growth engine slows, there aren’t many other easy sources of global supply”. Some analysts are saying that this could mean oil prices could go through $100 a barrel before year end.



In UK consumer/retailer news, we see UK consumer spending trends and an appeal for the new House of Fraser owner to do the right thing…

High street spending cools despite heatwave, says Visa (The Guardian, Patrick Collinson) cites the latest data from Visa which shows that spending in shops fell in July. The findings are not to be sniffed at given that Visa accounts for £1 in every £3 spent in the UK – and it said that the 0.9% fall in spending in July this year versus July 2017 was particularly pronounced in face-to-face spending in retail outlets, although online spend also fell. * SO WHAT? * Although warmer weather boosted spending on food, drink, restaurants and hotels it was not enough to make up for the shortfall in spending on transport and household goods. Mark Antipof, chief commercial officer at Visa, said that “retailers had a difficult time in early 2018, and while there was some respite in May and June, July’s fall in spending is concerning, particularly as we look ahead when the impact of the interest rate rise and back-to-school costs will likely put further pressure on Britons’ wallets”.

Department stores wilt as shopping habits shift (Daily Telegraph, Natasha Bernal) cites data, this time from the British Retail Consortium and Springboard, which shows that shopping centre footfall fell by 3.4% in July versus the same time last year and that the figures were even worse for department stores where footfall was down by 3.9% in retail trading hours.

None of this bodes particularly well for Sports Direct’s Mike Ashley, who bought House of Fraser last week – and now Ashley urged to pay £70m extra for House of Fraser (The Times, Deirdre Hipwell) shows that failed rival bidder Philip Day is saying that Ashley should “do the right thing” and make sure he pays all the suppliers and concession holders in full (who are owed around £70m in total) because he bought the company on the cheap. House of Fraser fell into administration on Friday morning before Ashley swooped in to hoover up the stores, brands and stock. Most of the £90m Ashley paid will be used by the administrators to pay off the banks and bondholders (as is always the way), with very little left over for anyone else. In addition to suppliers, there are 10,000 pension fund members who could be facing cuts to their retirement incomes. * SO WHAT? * Given what happened to BHS, you can imagine that the Pensions Regulator is going to be all over this and EVERYONE is going to be interested to see what happens to all the shops, concessions and employees. As things stand, he wants to make it the “Harrods of the high street”, close 31 of its 59 stores (as per the previous plan) and cut 6,000 jobs from the 17,000 who currently work there. As I have said before, I believe that department stores IN THEIR CURRENT FORM are an anachronism and are ripe for a huge change. Given how far these retail dinosaurs have fallen in recent years you would have thought that it is eminently possible that it won’t be too difficult to push through big changes, although it will still take time. I would personally like to see the spaces change to multi-usage retail/residential zones where you get mini-cities with a bit of office, a bit of residential and a bit of leisure under one roof. Funnily enough, Ashley owns gyms, has property interests (with his soon-to-be-son-in-law at the helm) and runs the notorious Sports Direct. If he does a good turnaround job quick enough, I imagine he will be able to pick up Debenhams (in which he already has a stake) for free (or £1) if he waits long enough – and then he really could be the king of the high street!



In individual company news, Alibaba vies with Tencent for food delivery supremacy, Google continues to make inroads in China, a massive Saudi Arabian fund looks at a bigger nibble of Tesla and administrators of phones 4U build up some cash…

Alibaba and Tencent in battle for China’s food delivery crown (Financial Times, Louise Lucas and Archie Zhang) takes a look at the battle going on between the two giants (worth a combined $900bn) as they battle for supremacy in a very competitive market. At the moment, both sides are throwing cash around in a bid to win customers, subsidising diners to the extent that they are able to eat restaurant food for less than it would cost to cook themselves! Tencent is the backer of Meituan Dianping (a company that also offers hotel bookings, ride-hailing and other services), which is preparing for a $60bn Hong Kong listing despite not being profitable, whilst Alibaba is the owner of, which recently partnered up with Starbucks to handle coffee deliveries. * SO WHAT? * Food delivery is just another example of an industry mushrooming with multiple wannabees jumping on the bandwagon only to be consolidated into a few major players. This has resulted in individual couriers getting more expensive as companies vie for their services, impact on the environment due to pollution and plastics packaging and a great deal of money being spent on a fickle customer base that will vanish as soon as the discounts disappear. It certainly seems that only the big will survive – and other food delivery companies around the world must be watching what’s going on in China with interest.

You may recall recently that I mentioned Google’s recent upping of the ante in its China charm offensive – well in Google woos partners for potential China expansion (Wall Street Journal, Douglas MacMillan, Shan Li and Liza Lin) we see that Google has been busy in the

background by providing app developers, manufacturers and advertisers with their software ecosystem to help them reach customers both domestically and internationally. It is currently testing a mobile version of its search engine that is censorship-friendly and will use its other Chinese activities to help convince authorities to open the door that is currently locked to them. This stands in contrast to rival Facebook which is also keen on China expansion but has been less active in other areas. * SO WHAT? * This is an interesting article which looks at how Google has quietly been consolidating and expanding its relationships in China in order to be able to argue that its presence is boosting the economy and so it should therefore be looked upon more favourably as it has done a lot of work to support some of its domestic champions. From the sounds of this article, it would seem that Google has as decent chance of getting a proper foothold in the country and, given that its Asia-Pac sales rose by 36% in the latest quarter versus the same time period last year, you can see that the growth potential is clearly there. If they could unlock this, it would be an enormous coup.

In other intriguing news today, Giant Saudi fund emerges as Tesla bid backer (The Times, Tabby Kinder) looks at how Saudi Arabia’s ginormous sovereign wealth fund (called the Public Investment Fund, or PIF) is in talks that would result in it being a major investor in Tesla if it is taken private. The PIF already owns 5% of the company. * SO WHAT? * This sounds quite interesting, but I’m not sure how that’s going to affect the two lawsuits that have been slapped on Elon Musk following his tweets last week. I guess that, if the talks started before last week and had progressed to the extent that Musk could have made those claims, he will be golden. If, on the other hand, it can be proved that he was only in the preliminary stages and that his claims of finding a buyer were exaggerated, he may be in trouble. Either way, it looks like he will be taking the PIF.

Then in Phones U administrators raise £130m to take on mobile giants (Daily Telegraph, Christopher Williams) we see that the administrators for Phones 4U have built up a £130m pile of cash to go legal on the a*ses of rival mobile operators who, they allege, colluded to bring down its collapse four years ago. O2, Vodafone and EE have all denied wrongdoing, but this could get interesting given the size of the warchest built up by PwC. One to watch!



…And finally, in other news…

Were you excited by the Golden Ticket in Charlie and the Chocolate factory? Well it seems that there’s something along the same lines for hamburgers in McDonald’s is giving away a 24-carat McGold card – and it will get you free food for 50 years (The Mirror, Zoe Forsey I don’t think it includes a factory tour with Oompa Loompa equivalents (or maybe they are staffed by Little Ronnies, perhaps?) but they are serious about the lifetime supply.

AND FINALLY, here’s something I never thought I’d see: The first ever pizza-vending machine in Japan is now operating in Hiroshima (SoraNews24, Dale Roll OMG.

As always, thank you for reading Watson’s Daily!