Profit warning from oil giant unnerves sector but Rio Tinto continues to gain ground
Oil firms and bookies are on the slide in early trading, but with mining shares continuing to support the market, the leading index managed to remain on a fairly even keel.
A shock profit warning from oil major Royal Dutch Shell was never going to be well received, and its A shares are leading the FTSE 100 fallers, down 72p or more than 3% to £21.23. Its B shares are also down a similar amount, while BP has also been hit by the Shell news, down 6.1p at 483.35p.
Meanwhile William Hill is down 9.9p at 362.8p despite the bookmaker forecasting full year profits of £334m for 2013, in line with expectations, and a subsequent raft of analyst buy notes. James Hollins at Investec was typical:
William Hill had a strong end to the year and we are upgrading 2013 estimates by around 3%, reflecting a retail revenue and group margin beat. Looking through punter-friendly football trading in the second week of the current year, we expect 2014 to see continued UK online market share gains from a leading sports online/mobile product and improved mobile gaming, solid retail free cash flow generation, and further enhancements to the Australian and US businesses. William Hill remains our key sector pick (unchanged 530p price target).
However, investors are worried about the government's concerns on fixed odds betting machines in bookmakers' shops, which earn the industry around £1.5bn but have been criticised for possibly fuelling gambling addiction, not to mention allegedly being used for money laundering.
William Hill also admitted that last weekend's run of wins by the top seven teams in the Premier League had cost it £13m.
Rival Ladbrokes, which reported on Thursday, has fallen 7.3p to 168.7p.
Overall the FTSE 100 has dipped 2.18 points to 6813.24, with mining shares lifted by hopes of continued growth in key market China.
Rio Tinto has risen another 55.5p to £33.90 following a positive update on Thursday, which has prompted JP Morgan Cazenove to raise its target price from £44 to £45. It said:
Rio is our preferred diversified miner in 2014 based on its best in class free cash flow improvement and increasing potential for capital returns in 2015/2016, as net debt now falls to less than $14bn by the end of June 2015 on our revised estimates.
We are cautious on the immediate iron ore outlook due to expected seasonal demand softening, yet Rio stands out as the cheapest diversified even at lower prices.
Glencore Xstrata has added 8.7p to 335.9p while BHP Billiton is 20p better at £18.80.
Rebecca O'Keeffe at Interactive Investor said:
It is one step forward, one step back at the moment, as equity markets struggle to find any momentum. With Central Bank support, expectations of increased global growth, M&A news and the burgeoning return of consumer confidence, the backdrop for investment is favourable. However the current high index levels combined with mixed corporate results have seen caution prevail, and whilst investors are not currently selling, many remain reluctant to commit additional funds.
A profit warning from one of the most stable stocks is always a concern, but with Shell delivering a major blow to investors, the big question for investors in the sector is whether they should also be concerned. Many of the issues affecting Shell seem stock specific but there are some generic concerns, including weak margins on its European downstream business and problems in Nigeria, which may worry other oil company investors.
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