Utility Week

16 | 20TH - 26TH MARCH 2020 | UTILITY WEEK Finance & Investment Indeed, the market generally liked the political outcome – and responded positively until very recently. Economic impact of Coronavirus The stock market bloodbath of recent days should perhaps be seen in three phases. The first phase encompassed the health aspects of Coronavirus, whose origins are believed to lie in the city of Wuhan, China. Initially, most media reports focused on the health element, but financial markets started panicking when swathes of north- ern Italy were identified as a major breeding ground for the virus. As the number of victims grew, the sec- ond area of focus was economic growth pro- jections – specifically, to what extent they would be pared back as a result. Clearly, the latest draconian restrictions in Italy will adversely impact that country's economic prospects. And, with Italy saddled with a very high public debt figure, there may well be a follow-through impact on the euro. Undoubtedly, rates of growth in many other leading countries will also fall; several may well move into recession, including the EU's German powerhouse. This negative economic outlook is com- pounded by the fact that most EU countries, with Germany being an obvious exception, have very high levels of public debt – a leg- acy, in part at least, of the excesses leading to the 2008/09 credit crisis. Furthermore, with interest rates being either very low – or in some cases, negative – many countries lack monetary ammunition to provide the necessary financial support. Oil prices tumble The third element that has sent stock mar- kets tumbling kicked in with a vengeance early last week when oil prices plunged, as Saudi Arabia, the lynchpin of the Opec car- tel, fell out badly with Russia. Both countries are in urgent need of reve- Finance & Investment Analysis The Great Correction? Last week's stock market bloodbath saw the share prices of Centrica, BP and Shell plunge while water firms held steady. Nigel Hawkins discusses the fluctuating fortunes of the listed utilities. T he past week has been a turbulent time for the UK stock market, with the FTSE 100 index shedding around 20 per cent over the past three weeks. In some cases, near panic has ensued. Indeed, the US market was twice suspended last week – on Monday and Thursday. For many, these share price falls are a much needed correction to a long-standing bull market that is running out of steam; it dates back to the recovery from the credit cri- sis of 2008/09. Furthermore, the decisive UK general election result in December, which gave the Conservative Party an 80-seat majority, was widely seen as a positive for the mar- ket, given that the seemingly unbreakable impasse over Brexit had been resolved. One sector that gained noticeably from the outcome of the general election was the utility industry. Many companies had been seriously threatened by the possible election of a Labour government committed to wide- spread utility renationalisation. Companies in the Labour Party's cross- hairs included National Grid, British Telec om – a late addition – and almost the entire water sector. The decisive result no doubt provided executives of the utility companies with considerable relief. nues from oil sales and are now cranking up production as oil prices fall to around $36/ barrel for Brent crude (the European bench- mark). In October 2018, the price peaked at $85/barrel. Of course, the outlook for oil prices may change. But, at present, it looks unremit- tingly negative – a scenario that hammers the FTSE 100 index. The index weighting of Shell, both A and B, as well as of BP, is formidable. In Shell's case, its share price has halved in just eight months – an astonishing turnaround for so solid a business. Importantly, too, both major oil compa- nies are very heavy dividend payers. Shell itself is responsible for around 13 per cent of FTSE 100 dividend payments. Mil- lions of retired people, directly or indirectly, are reliant on Shell's quarterly dividends. The good news is that, despite plunging oil prices, Shell's dividend payment record is remarkable: there has been no cut since the end of the Second World War in 1945. Contrast this highly reassuring dividend record with that of struggling Centrica, whose latest dividend cut last year amounted to 58 per cent. BP's record is less impressive, mainly because of the catastrophic Macondo blow- out in 2010, when dividends were suspended for a period as BP sought to recover from this disaster in which 11 workers were killed. For utilities, major oil price movements are relevant because of their impact on the gas price. Although the correlation is not as close as it used to be, lower gas prices still have a pronounced impact. While Centrica has moved away from electricity generation, it is still very depend- ent on prevailing gas prices. Quite simply, the value of its core product has plummeted, further shrinking its low margins. Add to that the undoubtedly negative impact of retail price controls – about which the company has sounded off in recent months – and it is no surprise that Centrica's share price has nosedived; at time of writing it was at just one-fi¤h of the July 2015 figure. For one of the UK's largest utilities, these Centrica CEO Iain Conn's successor, group chief financial officer Chris O'Shea, will face a difficult challenge

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