SVS: CFD TRADING VOLATILITY OIL & MINING STOCKS Risk Warning: CFDs are a high risk, leveraged product and can result in losses that exceed your initial deposit. CFD trading may not be suitable for everyone, so please ensure that you fully understand the risks involved before trading. Prices may change quickly, go down as well as up, and past performance is not an indicator of future success. This report is not, and should not be construed as containing, investment advice or a recommendation. The value of all investments can go down as well as up. You may not get back all the funds you invest, and you should consult a financial advisor if you are unsure whether CFDs are a suitable investment for you. SVS CFDs is a trading name of IG Markets Limited, which is a Member of the London Stock Exchange and is authorised and regulated by the Financial Authority (F A Register number 195355). SVS Securities Plc is authorised and regulated by the Financial Authority (Reg. 220929). SVS Securities Plc is a member of the London Stock Exchange. Company No. 04402606. The company is registered in England and Wales.
SVS: CFD TRADING VOLATILITY. OIL & MINING STOCKS With stock prices fluctuating wildly from day to day, it is no wonder that the word on everybody s lips is volatility. Earlier this month, the S&P500 volatility index reached 48.0, the highest value reached since February 2009. WHY ARE THE MARKETS SO VOLATILE? The American markets are in turmoil after the much publicised downgrading of U.S. debt and the sluggish growth of the American economy. The continuing struggle of the euro and the ever-present threat of a European default have affected even the strongest European economies. These problems and many more have instilled fear in investors and are propagating a self-fulfilling prophecy: Investors are scared of the macroeconomic climate and as such are withdrawing from the markets and investing in safe haven commodities. Unfortunately this mass exodus from the stock market is causing stock prices to plummet, which is scaring off even more investors and causing them to withdraw their investments and invest in other safer options. SO HOW DOES VOLATILITY AFFECT YOU? There s no need to panic. Volatile markets aren t necessarily a bad thing. Long term investors may not be affected at all if they can just keep hold of their stocks and ride the storm until prices begin to rise again. Of course there are no guarantees. There is always a chance that prices might never recover. The problem is that with lower share prices companies may find themselves unable to grow significantly which may eventually lead to their demise. OIL & MINING Oil and Mining stocks are slightly different to other stocks in so much as their prices aren t so heavily dependent on supply and demand of the stock but also on supply and demand of the commodity they produce. As well as the macroeconomic factors which are affecting all shares and markets across the globe, oil and mined commodities have other factors affecting their prices. ADDITIONAL FACTORS AFFECTING THE PRICE OF OIL The recent global purchasing managers survey has predicted a fall in oil demand, most notably from China and India. If this is true, it could contribute to falling oil prices as supply outstrips demand. News of hurricanes and tropical storms heading towards the oil producing installations in the Gulf of Mexico. Should these areas fall victim to hurricanes or tropical storms, it may affect their ability to produce oil which may result in the supply of oil being unable to keep up with the demand, which could push prices up. Protests and civil unrest in the Middle East and Northern Africa have disrupted production and supply of oil which has pushed prices up. The OPEC has refused to make up the Libyan shortfall despite having stockpiles of over a trillion barrels. This has maintained the shortfall in supply and kept prices high. The IEA has released 60 million barrels of strategic stock in a bid to make up some of the Libyan shortfall and to push prices back down. 2
ADDITIONAL FACTORS AFFECTING THE PRICE OF MINED COMMODITIES Political unrest in a number of countries which are rich in precious metals and mined commodities. During times of civil unrest or political upheaval, exploration, mining and production can be affected or stop all together. If this continues for a prolonged period, it can affect supply and push prices up. Investors are heavily investing in gold and other precious metals as a safe haven. This influx of investors has caused the price of gold and other precious metals to surge upwards. Proliferation of precious metals being used in modern technology. Advancements in technology have created a new demand for precious metals as they are used in a wide variety of modern technological advancements. This increase in demand is pushing prices up. With such an array of factors affecting commodity prices, it is no wonder that they are so volatile. It is said that volatility rises as markets slump. Because of this there are some who suggest that periods of volatility are a good time to buy. It offers investors an opportunity to buy shares while they are cheap and then reap the rewards in future when the market picks up again. This isn t always the case however as there is no guarantee that prices will rise, or that the company you have invested in will still be going in a year/month/days time. Volatile markets are a time of much higher risk but with the possibility for much higher rewards. If, despite the risks, you are still interested in investing in oil or mining, here is a small selection of relevant companies with some background information on their business and how they have been performing in such turbulent markets. ROYAL DUTCH SHELL PLC (RDSA/RDSB) PRICE: 1,932p/1,943p MARKET CAP: 67,713M/ 51,362M www.shell.com Royal Dutch Shell PLC is probably one of the best-known energy and petrochemical companies in the world today. This is hardly surprising when you consider the fact that they employ over 93,000 employees, operate in over 90 different countries and have over 43,000 service stations world wide (the largest branded fuel retail network in the world). Royal Dutch Shell PLC s projects are extensive and wide ranging, covering everything from exploration, mining and extraction of oil and gas, through production of green and alternative energies, all the way to supply, distribution and retail sales. Despite the economic climate, Royal Dutch Shell PLC have 24 upstream projects in development. These projects will add 800 thousand boe/d production potential upon completion in 2014. It is worth noting that Royal Dutch Shell PLC is traded on the London, Amsterdam and New York stock exchanges and has two different types of shares on each; Class A ordinary shares and Class B ordinary shares. These shares have identical rights but the dividend access mechanism applies only to the Class B ordinary shares. The dividend access mechanism allows holders of Class B ordinary shares to receive dividends without those dividends being subject to Dutch withholding tax. There are various exemptions to the withholding tax which affects the Class A ordinary shares and it is worth thoroughly researching the difference between the shares or talking it over with your financial advisor before investing. One of the most attractive things about investing in Royal Dutch Shell PLC is its dividend policy. Their policy states that it is their intention to pay dividends quarterly. In the second quarter of 2011, the dividend received per share for both Class A ordinary shares and Class B ordinary shares was $0.42 ( 0.25). 3
PETROFAC (PFC) PRICE: 1,200p MARKET CAP: 4,031M www.petrofac.com Petrofac is an international provider of facilities solutions to the oil and gas production and processing industries. They design and build oil and gas facilities across the full life cycle of oil and gas assets. As well as this, with a move towards environmentally-responsible and reliable energy supplies, Petrofac is branching into engineering, procurement, construction, operations, maintenance, training and consultancy in renewable energy and low-carbon sectors. Petrofac has over 13,000 employees and six strategically located operational centres. Due to their wide range of skills and international reach, Petrofac has a diverse customer base comprising of national, international and integrated oil companies. Petrofac s vision is to be the global oil and gas industry s premier facilities and infrastructure provider, admired by customers and employees for consistently delivering and rewarding excellence. Petrofac s policy is to pay an interim and a final dividend each financial year. The interim dividend is approximately one third of the years overall dividend with the final dividend being the remaining two thirds. The interim and final dividends for 2010 were 8.91p and 18.42p respectively. BHP BILLITON PLC (BLT) PRICE: 1,892p MARKET CAP: 39,773M www.bhpbilliton.com BHP Billiton is a global resources company operating in 25 countries around the world and dealing in 20 different commodities. Their aim is to create long-term value through the discovery, development and conversion of natural resources, and the provision of innovative customer and market focused solutions. BHP Billiton PLC is listed on the London Stock Exchange while its sister company BHP Billiton LTD is listed on the Australian Securities Exchange. Both companies have identical Boards of Directors and are run by a single management team. Shareholders in each company have equivalent economic and voting rights in both companies. BHP Billiton produces 20 different commodities in various locations across the globe in an attempt to lower risk via diversification. BHP Billiton is now the sixth largest producer of aluminium in the world, one of the leading iron ore producers in the world, owns and operates 60% of the world s largest integrated producer of manganese units and is the forth largest producer of nickel. BHP Billiton has a dividend policy that seeks to steadily increase, or at least maintain the dividend at each half-yearly payment. In February 2011, BHP Billiton declared an interim dividend of $0.46 ( 0.28). The final dividend for the 2011 financial year will be announced on 24th August 2011. RIO TINTO PLC (RIO) PRICE: 3,451.5p MARKET CAP: 51,496M www.riotinto.com Rio Tinto is an international mining group combining the London Stock Exchange listed Rio Tinto PLC with the Australian Stock Exchange listed Rio Tinto LTD. The two companies are joined in a dual listed company structure as a single economic entity, called the Rio Tinto group. The Rio Tinto group s objective is to maximise total shareholder return by sustainably finding, developing, mining and processing natural resources. Rio Tinto operates in a diverse range of countries and products but its main assets are in Australia and North America. Rio Tinto comprises of five main product groups and two support groups Aluminium, Copper, Diamonds & Minerals, Energy, Iron Ore, Technology & Innovation and Exploration. Rio Tinto is generally among the top five global producers in each of these markets. In 2010, Rio Tinto declared dividends to its shareholders of 0.67. This was a huge increase from its 2009 dividend of 0.29. The groups average total shareholder return for 2010 was 32.6%. This was partly attributed to strong commodity markets. TULLOW OIL (TLW) PRICE: 959p MARKET CAP: 8,370M www.tullowoil.com Tullow oil is an independent oil and gas exploration and production company with a strong presence in Africa. They are currently Africa s leading independent oil company with 53 licences in 15 countries. The company operates in 22 countries, employs 1,400 employees and has over 90 licences. Tullow oil currently has two major projects under way; one in Ghana and one in Uganda. In Ghana, Tullow oil s project (the Jubilee field) commenced oil production in November 2010 and is expected to meet its full production potential of 120,000 barrels of oil per day later this month. The Jubilee field has estimated recoverable resources of 1 billion barrels. To date in Uganda, 40 wells have been drilled and 1.1 billion barrels of resources have been discovered. Tullow oil s strategy to achieve sustainable long-term growth is through balanced funding, exploration and production in core geographical areas. The success rate of exploration and appraisal across Tullow oil s portfolio has been consistently high in the past three years achieving a 77% success rate in 2008, 87% success rate in 2009, 83% success rate in 2010 and a 75% success rate so far in 2011. Tullow oil s half yearly results are due for release on 24th August. In July, Tullow oil s chief executive Aidan Heavey commented The performance of our business since the beginning of 2011 has been excellent and we expect to deliver record financial results for the first half of the year. Exactly 4
what the report will say is, as yet unknown but if the results are as good as Tullow oil predict it can only have a good effect on their share price. Tullow oil pays dividends twice a year. Since 2008 Tullow oil have paid a preliminary dividend of 0.04 in the beginning of the year and a further interim dividend of 0.02 at the end of the year. 2011 is looking to be no different as a preliminary dividend of 0.04 was awarded in April. Please note, all prices and market data were taken from the London stock exchange (www.londonstockexchange.com) and were correct on the 22/8/2011. These company profiles are a selection of relevant companies and in no way constitute a recommendation for investment. As testament to how volatile oil and mining prices are, today s news of Libyan rebels taking Tripoli has already had an affect on the markets. Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney commented that The immediate reaction should be that you ll see more crude come onto the market. He continued to say There is the potential for 1 million barrels to come back online soon. With such a surge in production, it is expected that oil prices will fall. Caroline Bain of the Economist Intelligence Unit said Oil prices can be expected to fall further if Gaddafi is removed from power as the prospect of resumed output from Libya will remove some of the political risk premium in the oil price. No-one can deny that markets today are volatile. This is doubly true for commodities which, as well as the usual macroeconomic factors, have a number of completely different factors affecting their prices. With shares jumping up and down across the world, the question you need to ask yourself is: Do I have the stomach to invest in this market? The outlook isn t as dire as some people make out. There are, of course, opportunities for investors to make money on their investments by buying shares while they are cheap and waiting for prices recover. The downside however, is that there is just as much chance that you will lose money on your investment and that the companies you invest in will find themselves irreparably damaged by the economic storm and unable to recover. LOOKING TO TRADE CFDS? TALK TO SVSCFD ABOUT THEIR CFD ADVISORY OR EXECUTION-ONLY ACCOUNTS. APPLY FOR AN ACCOUNT SPEAK DIRECTLY TO AN SVS ADVISOR INFO@SVSCFD.COM Phone: 020 3700 0104 Fax: 020 3700 0101 www.svscfd.com 5