Shell looks a better buy than Lord Browne's BP

Hold on to Intermediate Capital; Durlacher could reward the brave
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The Independent Online

Phil Watts, the chairman of Shell, got his betrayal in early. Lord Browne of BP is only now abandoning the idealistic targets he set his oil giant last year, and he angered the City yesterday by appearing to do it by stealth.

Phil Watts, the chairman of Shell, got his betrayal in early. Lord Browne of BP is only now abandoning the idealistic targets he set his oil giant last year, and he angered the City yesterday by appearing to do it by stealth.

Until now, the reputations of the two companies and the two men have been at opposite ends of the scale. Where Lord Browne is fêted, Mr Watts is slated for failing to communicate with the City. And where Shell has seemed at sea over strategy and lacking operational focus, BP has consistently done what it said it would, and done it well.

Until now. The discount at which Shell shares have traded is no longer justified.

BP's trading update yesterday downgraded its production forecasts for the second time in a month, and the excuses did not convince. The tropical storm Isidore disrupted production, to be sure, but as Shell's laconic spokeswoman put it yesterday: "Hurricanes happen every year, and we provide for them in our plans." That as Shell airlifted its Gulf of Mexico workers to escape Hurricane Lili.

As the oil price eased back from its 2000 highs, both Shell and BP were tempted into over-ambitious targets for production growth to help plug the earnings gap. Shell's target for 5 per cent annual growth didn't stay intact for more than a few months before it became clear it couldn't get as much out of maturing oil fields as it hoped, and a few new exploration projects were delayed or didn't come through at all. BP's higher target of 5.5 per cent annual growth for five year is still nominally intact, but now looks very tough to achieve. It won't make it this year, because of the weather, a disaster in Alaska and other problems, so there is much more to make up in the years towards 2006. And it has diluted the target, allowing acquisitions to count.

Oil stocks are attractive, since the price of crude has stayed stubbornly high. The threat of war and the accelerating drop in oil stocks in the US will assist Opec in its determination to keep the price up. This windfall should make up for the disappointments on production and the difficult markets for downstream products such as chemicals.

BP shares trade on a multiple of 16, this year's earnings falling to 15. Because of the perceived lower growth, Shell is on 15, falling to 14. BP has a dividend yield of 3.4 per cent; Shell's is 3.7 per cent. The threats to the reputations of BP and its chairman are such that Shell is a better buy.

Hold on to Intermediate Capital

In the obscure and complex world of European mezzanine finance, Intermediate Capital Group is king. Mezzanine plugs the gap when banks don't want to risk too much of their cash to back a management buyout and management doesn't want to give too much equity away to the venture capitalists. ICG loans cash in return for high interest and the right to buy shares in the business at a knock-down price later.

The private-equity market has been in the doldrums for 18 months, so there was a cheer at news ICG managed to grow profits by 4 per cent to £26m in the six months to 31 July. Core income, which excludes the money ICG gets by cashing in its shareholdings, was up 12 per cent, in line with expectations.

Better still, the outlook is grand. There are a few big deals knocking around, and ICG should take more than its fair share of the mezzanine market in the second half of the year. It has already signed five loans totalling £92m since the end of July.

ICG is so confident of its prospects it has hiked its dividend (it yields 4 per cent) and promised to extend its overdraft to pursue new business. The company's move into France was the engine behind the first half growth; it has now signed its first deal in Hong Kong, where its office is expected to break even next year; and it is now scoping the Spanish market, too.

ICG's fund management business is one worry. It took a hit on high-yield telecoms debt, although it continues to outperform its peers. Another is that new competitors have entered the mezzanine market, but thus far they do not seem to have driven down interest margins.

Up 60p to 776.5p last night, ICG shares trade on 14 times core earnings. That looks decent value, particularly because gains from its equity stake sales are not included. Keep a tight hold.

Durlacher could reward the brave

Durlacher got on the New Economy roller-coaster at exactly the right time. The sleepy stockbroker turned itself into a mini investment bank for tech companies, organised a host of their IPOs and invested heavily in their shares. At the top, it was close to becoming a FTSE 100 stock.

That seems impossible to believe now, after the rollercoaster screeched to a stop. Shares that hit 440p, yesterday traded at 0.82p, down 0.11p.

It would take a brave investor to step back on board. Durlacher's image has been tarnished and it is competing in a sector where almost no one is making any money at the moment. Yet Durlacher has looked more positive since Christopher Stainforth became chief executive in April.

Costs have been slashed and clients quintupled. Losses fell to £10m in the year to 30 June, from £45m, and Durlacher should break even this year, making its £8m cash pile look a comfortable buffer.

Mr Stainforth has spring-cleaned Durlacher's finances, so yesterday's £6.7m write-down will be one of the last hangovers from Durlacher's disastrous technology investments. It plans to consolidate its shares in a one-for-140 offer, making it possible in the future to raise cash. Mr Stainforth now plans to start spending to try to attract more able staff, especially those from sectors other than technology.

Durlacher is very unlikely to reach previous heady heights, but brave investors might like to strap themselves in for a more gentle ride.

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