Airlines & oil – Qantas launches market offensive
City Index November 15, 2012 10:25 AM
<p>Australia’s national career Qantas launched an offensive on the market today, announcing early repayment of debt due to mature mid next year and an on […]</p>
Australia’s national career Qantas launched an offensive on the market today, announcing early repayment of debt due to mature mid next year and an on market buyback of up to 4% of its outstanding securities.
The announcement has two distinct motivations:
* First, by repaying debt early Qantas is sending a signal to the market that concerns this year over the need for it to raise equity have been overblown and it has no intention of raising equity from shareholders at all. Its recent code sharing arrangement with Emirates Airlines will help contain losses in its international business as it hopes to shift its fate towards Asia.
* Secondly, the buyback shows how undervalued Qantas shares actually are. Instead of committing to new capital expenditure, Qantas’ bankers have pointed out that the value of its shares are trading at a big discount to its net fleet replacement value alone and so the opportunity to reinvest funds from recent divestments into its own shares.
There aren’t too many global airlines turning a profit, yet alone buying back their own shares on market. The announcement was coupled with a trading update which shows Qantas is set to book a $180-$230m underlying interim profit for the six months to December – again, a solid outcome in light of higher oil prices and increased competition. Emirates in comparison announced a $440m profit for the first half of its 2013 financial year.
Military tensions unlikely to create prolonged Oil rally
Are oil prices about to rise again and cause headaches for global consumers already struggling with sluggish domestic growth? Conventional wisdom suggests that tensions in the Middle East overnight from Israeli’s strike at Hamas should put upward pressure on oil prices. Tensions in the Middle East are usually always short term reasons to buy oil, in the hope that supply could be disrupted. But this is actually an exaggerated narrative and data over the past two years has shown otherwise.
Despite growing tensions around the Arab Spring, the war in Libya, dangerous rhetoric between Iran and the West which have led to strict sanctions and growing unrest in Bahrain and Saudi Arabia – the Middle East was the highest growth region in terms of oil supplies in the year to June 2012. BP’s annual statistical review shows that the Middle East grew production by 9.3% last year, with Kuwait, the United Arab Emirates and Saudi Arabia increasing production by 14.1%, 14.2% and 12.7% respectively.
Bottom line: It’s not so much about the broader Middle East, its more so an issue with what’s happening in the Gulf region. This is what matters when it comes to oil production and trade supplies. Neither Israel, Jordan, Lebanon, Egypt nor Syria are key producers of oil. Brent crude remains comfortably within the US$105-115 band range we have called since September (see note here), even after last night’s military action. We think the upcoming OPEC meeting in Vienna on 12 December will be more important than the actions in Gaza, even if it does lead to a full military ground campaign by the Israeli Defense Force.
The market will look more closely at comments from Gulf officials. There is a broader geopolitical question as to the aspiration of Gulf leaders, given the Qatari leaders recent visit to Hamas controlled areas in Gaza. But the Gulf countries know too well that their military and economic interests are tied to the West and the high oil prices cannot be tolerated in such sluggish growth circumstances. We think the key Gulf producers will talk up production and put a lid on any short term price increases, as has been the case recently in the lead up to OPEC meetings.
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