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Glencore - Oil and commodity prices weigh heavily

Richard Hunter | 19 August 2015 | A A A
Glencore - Oil and commodity prices weigh heavily

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Half year results: Much as expected, earnings fell sharply on the back of weaker commodity and oil prices, whilst also confirming the mixed production update from earlier in the month. The situation in China continues to hamper the sector in general, whilst the oil price decline had led to Glencore previously announcing an impairment of $790 million on its Chad assets. Foreign exchange was also a significant headwind, with the overall EBITDA number coming in at $4.61 billion, down from $6.46 billion a year earlier.

Highlights:

  • Adjusted EBITDA of $4.6 billion, down 29% compared to H1 2014 owing to substantially weaker commodity prices:
  • Marketing Adjusted EBITDA down 27% to $1.2 billion and Adjusted EBIT down 29% to $1.1 billion, with tough metals' trading conditions, particularly aluminium and nickel affected by the collapse in physical premiums and subdued levels of global stainless steel production.
  • Industrial Adjusted EBITDA down 29% to $3.4 billion, due to the substantially weaker net commodity price / exchange rate environment. Despite the weaker price environment, Metals and minerals' Adjusted EBITDA mining margin was still 24% compared to 30% in 2014 and Energy Adjusted EBITDA margin was 28% compared to 29%, reflecting the quality of the asset portfolio.
  • The sharp decline in oil prices in late 2014, which continued into 2015, led to significant amendments to the work programme at its assets in Chad, including changes to capex and production profiles and the number of drilling rigs in operation. As a result, the carrying value of these fields/blocks has been impaired by $792 million.
  • Net debt decreased by $982 million to $29.6 billion, reflecting a 21% reduction in net capital expenditure (excluding Las Bambas) and a release of non-RMI working capital of $3.2 billion, due naturally to lower commodity prices and some additional proactive working capital management to ensure a more efficient balance sheet.
  • Strong and flexible balance sheet, with $10.5 billion of committed available liquidity at period end.
  • Capital management:
  • During the period, $240 million of its shares were acquired under the previously announced $1.0 billion share buyback programme, completing this initiative.
  • The Board has declared an interim distribution of $6 cents per share, consistent with the 2014 interim distribution, reflecting its confidence in the prospects and strength of its underlying operations, commodities mix and sustainable cashflow profile.
  • The target industrial capex ceiling for full year 2015 is now $6 billion, compared to the range of $6.5-6.8 billion previously communicated. Glencore currently anticipate that industrial capex for 2016 will be no more than $5.0 billion.

Chief Executive comment and outlook:

"Against a challenging backdrop for many of our commodities, we have taken a range of pre-emptive actions in respect of our balance sheet, operations and capital spending/recycling in order to preserve our current credit rating and sustain our track record on equity distributions.

Our core industrial assets remain well positioned on their respective cost curves. We remain by far the most diversified commodity producer and marketer and are well positioned to benefit from any improvement in pricing when it finally and inevitably materialises. Our principal objective remains to grow our free cash flow per share and return any excess capital in the most sustainable and efficient manner."

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.