Why I’ve sold all of my Shell and BP shares, by manager of £543 million

Bailey concluded his comments with the remark that the Shell dividend is uncovered. That means the company is not generating enough cash to pay the dividend itself.

David Thorpe 25 Aug 2016

Stephen Bailey, who runs the Liontrust Macro Equity Income fund has revealed the reasons why he has sold all of his shares in Shell and BP.

He began selling his Shell shares about a year ago, and completed the sale, ‘during the month of August’ 2016.

Bailey commented, ‘A year ago we had 9 per cent of the fund in oil, now it’s zero. You have to look at the macro view on this, and be very concerned about the oil market. The big suppliers in the market can no longer be controlled by OPEC, the Saudis recently announced an initiative called project 2030 which is aimed at boosting other areas of the economy, and they are doing that because they expect to receive less revenue from fossil fuels in the future.’  

Bailey continued, ‘Although the shares have done well lately because dollar earnings are very popular with UK investors right now, there are bigger issues, the oil price is below $50 right now, and those companies need it to be between $60 and $70 to maintain the dividends. The four biggest oil companies in the world, Shell, BP, Exxon Mobil, and Chevron, have between them got $190 billion of debt. That is twice the level of 2014. Now that leaves the oil companies in a very tricky position, because they will have to start worrying about their credit ratings, the problem with that is, if they keep borrowing to pay the dividend, they could lose their credit rating, if they stop borrowing and cut their dividends, then they keep the credit rating and lose the dividend. That is the pain the big miners took last year. We think the investment case for Shell is too risky right now.’

Bailey concluded his comments with the remark that the Shell dividend is uncovered. That means the company is not generating enough cash to pay the dividend itself.

The fund manager commented, ‘the difference is that while GlaxoSmithKline’s dividend wasn’t covered, the management had some idea, some sight of when they would have the earnings to cover the dividend. The problem for Shell is that because it doesn’t control the oil price, it can have no idea about the earnings.’

The £543 million Liontrust Macro Equity Income fund has returned 25 per cent over the past three years.

SOURCE

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