Market update - 27 June

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The Independent Online

The FTSE 100 was down 17.6 points at 5500.6, while the FTSE 250 was down 35.5 at 9071.6 at 12.03pm today.

Moving up

The oil price reached a fresh record near $142 a barrel and Cairn Energy climbed to first place on the benchmark index, up more than 6 per cent or 194p at 3280. The company was also helped by positive comment from Cazenove, whose analysts upgraded the stock to "outperform" from "in-line".



"Since reaching a high of 3681p on 21st May, Cairn's share price has fallen by 16% to a current share price of 3086p. Total shareholder return since the beginning of the year has been a lacklustre 0.4%, despite a soaring oil price. At current levels, we believe Cairn's valuation looks attractive again, with upside of 13% to our fair value of 3500p," the broker said, adding:

"Cairn has above average gearing to the price of crude, so if the oil price corrects in the near term, Cairn's share price will likely suffer as well. However, we make two points i) despite being viewed as an oil price play, Cairn's share price has not fully registered the surge in crude prices this year. Its share price is up by only 4% since the beginning of the year whilst the oil price is up 41% ii) on a long term oil price assumption of $75/bbl, Cairn's valuation does not look demanding, and although we see more downside than upside risk to the spot price of crude, we see more upside than downside risk to our long term oil price assumptions. Thus, we expect Cairn's share price to continue to benefit from the narrowing of the gap between analyst assumptions and the futures strip."



Good broker sentiment also helped Tullow Oil, which climbed by 52p to 978p – Deutsche Bank chose the company as one of its top picks in the oil & gas exploration and production sector and increased its target price for the stock to 1490p from 1070p.



"In less than one year Tullow has moved the Jubilee field in Ghana from a high-risk/high reward frontier prospect, to the most material element of our core NAV. This aggressive programme of appraisal has lifted Jubilee's P50 resource to 1 billion barrels, 3 further appraisal wells due this year still having the potential to deliver 'significant increases in field size'. In parallel, activity is stepping up in Uganda – drilling in the Butiaba region delivering at least one well a month from now to beyond the year's end, and a result expected from Kingfisher deep in 40 to 60 days," said Deutsche.



Metals prices were also doing well this morning and Kazakhmys climbed by 49p to 1604p. Like Cairn and Tullow, the miner was also helped by a positive broker report – Deutsche Bank, whose analysts moved the stock to "buy" from "hold", said the "recent acquisition of the Ekibastuz power station puts the company in a good position to take advantage of an eventual higher energy price environment".



House builders were also doing well this morning – good results from Berkeley, which has proved more resilient than its peers, drove the sector and Taylor Wimpey climbed to 60.25p, up 9.55 per cent or 5.25p and Bellway was up 23p at 466.25p. Berkeley gained 16.5p to 679.5p.



Moving down



The banking sector remained weak as Citigroup suggested that Barclays, which recently announced plans to raise up to £4.5bn in fresh capital, may need an extra £9bn.

"Post the capital issuance we estimate that Barclays will have a 2008E Equity Tier 1 ratio of 5.8% (9th worst in Europe) and a tangible equity: assets ratio of 1.5% (6th worst in Europe). Simply moving the Equity Tier 1 ratio into line with RBS (6.4%) would require an extra £2.5bn, with RBS-style credit write-downs increasing this figure to c£9bn", the broker said, adding:

"New disclosures from US investment banks show Tier 1 ratios in excess of 10%. Capitalising Barclays Capital at a similar level would not only require virtually all of the group's equity but would drive returns below the cost of capital. Although we recognise that regulators look at the consolidated group position, we have used a valuation approach which captures the impact of the notional capital deficit."



In the wider sector, HBOS was trading below its 275p rights issue offer price, down 4.25p at 271.5p.



Wolseley was down 12p at 391.5p after ABN Amro moved the stock to "sell" from "hold".



"Rising interest rate expectations, nominal house price declines (an unknown to the US homeowner) and the severity of credit constraint, most notably in the UK and US, requires, in our view, a fundamental management rethink on Wolseley's capital structure," the broker said, adding:

"We remain of the view that Wolseley will breach its existing net debt to EBITDA covenant in FY09, and whilst we would expect Wolseley's banks to remain supportive, a restoration of the group's balance sheet strength before being forced to renegotiate has to make sense for shareholders."

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