Investment Column: Hold Shell but BP is oil sector pick

Capital & Regional looks like hot property; Tiger Tiger bars owner Urbium roars ahead
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The Independent Online

The valuation gap between the haves and the have-not of the FTSE 100 oil and gas sector has never been wider.

The valuation gap between the haves and the have-not of the FTSE 100 oil and gas sector has never been wider.

The haves - BP, the UK's largest company, and BG Group, the exploration and production rump of the old British Gas - are raking in cash and pumping up output. The have-not, luckless Shell, is struggling to cope with the debacle of its overstated reserves, which has caused a legal and regulatory firefight and brought opprobrium on the company's complicated management structure. Shell shares trade on 7 times post-tax cash flows compared with almost 9.6 times at BP and 10.3 times at BG.

The key question in this sector is if and when Shell will be a tempting investment again. We advised at Christmas that disappointed Shell shareholders should at least hang on and promised to revisit the stock after its 2003 results. Since then, of course, it has wiped out 3.9 billion barrels of its stated reserves and fired its chairman. The fall guys having fallen and some, albeit limited, boardroom reforms having been set in motion, sentiment at least should improve. On the financial side, though, we are left with a business which will struggle to grow production in the coming years. Contrast that with more than 7 per cent a year at BP (in part thanks to its risk taking in Russia) and a promise of 16 per cent a year at BG, and it is difficult to quibble with the trio's respective share prices.

With fuel prices, oil in particular, likely to stay high for the next few years amid improving economic growth, instability in the Middle East and tightish controls by the Opec cartel, it is BP - which is most exposed to the oil price - which is the pick of the sector. Its shares will yield 3 per cent this year and it has promised further dividend increases. BG Group, expanding in Egypt and Kazakhstan, is the potential takeover candidate and the growth story of the three, but its shares, which hit a new high yesterday, are vulnerable to any trading hiccups and are only a hold. Shell, too, is worth holding for recovery.

Capital & Regional looks like hot property

Capital & Regional is an unusual beast: it described itself as a "co-investing asset manager" in the property sector.

The company teams up with institutional investors to form joint funds for investment. This gives Capital & Regional much greater firepower than that which would be available on its own. It enables the company to take a portion of a deal, such as yesterday's £12.8m purchase, through its The Junction fund, of a retail park at Thurrock which includes a giant Courts furniture warehouse.

As a result of operating in this way, through three funds, Capital & Regional manages a portfolio worth an impressive £2.9bn. It puts in some of the equity in each of these funds and then provides the management to run the real estate (collecting fees for its service).

As well as The Junction, which has become the sixth largest owner of out-of-town retail parks in the country, there is also the £1.2bn The Mall fund which specialises in in-town shopping centres. A third fund specialises in "urban entertainment complexes", such as the 02 centre on the Finchley Road in London, which provides leisure activities, with restaurants and cinemas, as well as shopping.

In 2003, Capital & Regional provided a 33 per cent uplift in net asset value to 521p, making it the best performer, on this measure, in the sector. Its shares (at 517p) do not trade at any discount to current assets, but with the growth available, this is no reason to worry. Merrill Lynch is forecasting a NAV for the end of this year of 619p, so there is plenty of room for a further rise in the shares. Buy.

Tiger Tiger bars owner Urbium roars ahead

One of the leisure sector companies to have burnt brightest this past year is the Tiger Tiger bars owner Urbium, whose shares are up 45 per cent since we tipped them back in July.

The group paused expansion plans last year as trading at its particular kind of high street bar-cum-club had a tough time, but it has its foot back on the accelerator now. Of its 27 venues and three new outlets due to open by June, 20 are in the heart of London. In the City, its newly opened Abacus late-night bar is trading ahead of expectations, Urbium said in an update at its shareholder meeting yesterday.

Turnover in the first quarter has been ahead of last year, it said, but winter is a period you don't want to read too much into. The company conducts its refurbishments during this particularly quiet period. None the less, the upbeat tone of yesterday's statement suggests it should have little difficulty meeting forecasts for substantial profit growth this year.

With interest cover of 10 times last year, further expansion is affordable, especially now prices of venues have eased. The leisure market is fickle, of course, but Urbium's venues - seven Tiger Tigers excepted - are mainly unbranded so it is more flexible than some. Recovering confidence among its City clientelle should also boost trading. Urbium shares are still undervalued at 564p, on 8 times current year earnings.

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