In the City
The BP success
Tony Rudd
The news that the huge BP issue was a success came slightly too late for noting in last week's issue. However the fact that the issue was a success was of tremendous significance to the City. For the new issue market the operation was comparable to surviving the Severn Bore intact in a small rowing boat. In the event nobody has been lost overboard, and all the passengers have remained dry.
In purely technical terms it must be said that the issue was a feather in the cap of all concerned. The amount of stock which was left over, from the subscriptions, was approximately the total which was not being taken up by the Government, namely over 60 million shares; these were placed with several hundred institutions in a speedy and tidy manner. Everybody had an opportunity of doing his duty and did so. The price at which the shares were placed, 315p, was exactly right so far as discharging the necessary obligation was concerned and just feasible in terms of the market price. All in all, a very satisfactory outcome.
And we!l worth taking the enormous risk, too. For if the issue hadn't gone well (and it only succeeded by a whisker) the new issue market would have been clogged up from here to Christmas time. This actually is where the logic of the operation breaks down. Because, on examination, one can not see really why the issue was so important. The wheels of British industry are not going to improve, as a result of this issue, by number unemployed is not going to fall, industrial production is not going to rise, the country's economic outlook is not really going to improve, as a result of this issue, by one iota. Indeed, on examination, it is a matter for wonder that the market took the issue at all. It is almost universally felt by the investment community both in London and in Wall Street that the outlook for the oil industry over the next two or three years is far from bright. Admittedly the ratings of the major oil companies have come back a great deal since the heady days of last year, to reflect this much more sombre outlook. There are some good values to be had amongst the major oil company shares, as a result. But very few analysts would suggest that investors should rush to grasp these values because of a risk of their disappearing overnight.
The consensus is that they are going to be around at current or indeed at even more attractive levels for the next year or so. Indeed, some leading authorities in this area consider that it will be as much as five years before oil shares go back on the front burners, as it were, and participate once more as the leading sector in a bull market in the way that they did during the past two or three years. Of all the areas, therefore, in which institutional and private investors need to top up their interests, that of the major oil companies represents perhaps the lowest priority of all. So it is a matter of some wonderment that BP and its advisors should have chosen this moment to come to the market for such an enormous slice of new capital. Last year they would at least have done so against a background of enthusiasm. But this year, they've only succeeded because of the innate loyalty of the underwriting market and of all those who sail in her.
Finally, to the extent that the money was required for purposes other than the development of BP's own oil interests, in other words for diversification outside the traditional areas, the issue was also illconceived. For if there's one thing that the shareholders of oil companies can do without, it is the efforts at diversification by their company's management outside their chosen industry. If they can't find enough, in the way of future prospects in oil, then they should, in all conscience, give the money back to the shareholders. It would be unfair to single out British Petroleum alone among oil companies for this propensity to dip and dabble elsewhere; it is a propensity shared by all the majors and it is leading them into all kinds of other businesses. To the extent that these giants succeed in this diversification thrust, it is open to their shareholders to sell their shares and, if they want to maintain their interest in oil as such, to reinvest the proceeds in small companies in that industry which still see a future in it. There are plenty of them.
Meanwhile, this week, the economic summit opens in Ottawa. Whether or not this August coming together of heads of state and prime ministers carries any real significance for those operating in markets such as those in the City, remains to be seen. More likely, there will be a number of high-sounding phrases and top-level verbiage in the inevitable communiqué which will leave those whose daily business is in buying and selling currencies, commodities, shares and so forth, absolutely cold. Nothing short of some kind of joint international effort aimed at, for instance, the lowering of interest rates on the one hand or the harmonisation of currency policies on the other, would be of significance. Indeed, for practical people, it has to be noted that the communiques of these get-togethers have shown an increasing divergence from the real world. When the need to avoid restrictions on trade has been emphasised, it has been a pound to a penny that restrictions on trade during the ensuing year would indeed grow. And so it has been. The sceptics will therefore take the view that the more there is in the way of high-flown aspirations, the less there will be of real progress in the year to come. What is needed is less verbiage and much more in the way of hard agreement. We can whistle for that.
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