Shell To Make History With $18bn Profit

Oil giant Royal Dutch / Shell will this week unveil the largest profit in UK corporate history. Income after tax will climb to around $17.5 billion, and is likely to exceed the takings of its arch rival BP, which reports the following week.

Despite last year being the Anglo-Dutch group’s ‘annus horribilis’, thanks to the reserve downgrades scandal, it is expected to report its best-ever results. These will exceed previous corporate highwater marks reached by banking group HSBC, which made £7.7bn last year.

The pre-tax profit figure will be even larger – up to $32bn – but analysts do not focus on this because oil companies treat taxes paid in the countries in which they operate differently, so comparison is difficult.

But some forecasters believe Shell’s after-tax number could exceed $18bn, and that the company will promise to hand back cash to shareholders via a share buy-back or special dividend worth between $2bn and $5bn.

Shell’s profits are expected to be about $1bn ahead of BP’s. BP chairman Lord Browne stirred controversy last week when he said the group’s cash-flow was ‘staggering’.

The performance comes on the back of last year’s sustained period of high oil prices, thanks to a surge in demand from China, instability in the Middle East and supply disruption and capacity shortages.
But consumer groups are unlikely to slate oil companies for profiteering as a price war has erupted on garage forecourts after supermarket groups Morrisons and Tesco slashed petrol prices. The oil majors have followed suit.

Analysts are expecting Shell’s net income to be $4bn to $5.5bn in the fourth quarter, and between $16.4bn and $17.9 for this year.

This is despite production volumes falling in the fourth quarter, although refinancing margins were strong.
Meanwhile, investors are anticipating further news on the reserves question. In the autumn the company said it might have to add another 900 million barrels of oil to the 4.47 billion it took out of its proven reserves last year.

Analysts are expecting it will have to confirm this figure, derived from an audit of 55 per cent of total Shell reserves, and are likely to have to add to it, following inspection of the remaining 45 per cent. Sanford Bernstein analyst Neil McMahon believes there will be an increase in the figure. ‘If it is from their big fields they would find the same problems. I would have thought there was more to come.’

A further 142 million barrels of oil will have to be taken out of proven reserves because of a downgrade in Canadian bitumen reserves.

Inheritance Tax Timebomb

Millions of homeowners face a tax timebomb unless the government changes inheritance tax laws, according to research for a large broadsheet newspaper.

Within 20 years one in three homeowners will have tax deducted at 40 per cent from their estate when they die, according to the study by the Halifax, Britain’s biggest mortgage lender.

The number of homeowners potentially liable to inheritance tax is likely to rise from 2.4 million now to 4 million by 2015 and 6 million in 20 years.

The tax has spread as house price inflation has far outpaced the rate at which has tax-free inheritance threshold – currently £263,000 – is set. The Royal Institution of Chartered Surveyors (RICS) and the Council of Mortgage Lenders are urging the government to link the threshold to house price inflation. If this had been done since 1993, it would now be £359,000.

Although middle England is starting to protest at the effect of inheritance tax (IHT), there are few signs that the government is listening, ‘I don’t think they will change their stance on this – given the budgetary pressures they are under,’ said Milan Khatri, head of economics at the RICS. ‘The government is using the easiest route possible to increase the tax take without putting up tax rates.’

John Whiting, of PricewaterhouseCoopers, formerly president of the Chartered Institute of Taxation, said: ‘IHT isn’t doing what it was originally designed to do – get at the wealthy and redistribute. It is increasingly affecting Mr, Mrs and Ms Average.’ He would like to see a review of the tax take place, rather than letting it increase its scope ‘by accident’.

People dying in Gerrards Cross, Bucks – the town with the most expensive houses in Britain – would lave an IHT bill of £145,000 on today’s average property prices if they died now.

But there are 85 other towns where the average property price is above the threshold.
Paying the bills can create practical problems for children and others who inherit. The worst arise when the house is the only asset and must be sold to pay the tax. Although IHT bills can be paid in instalments over 10 years, the full bill must be paid immediately if the asset is sold.

The Post Office Plans An Onslaught On BT

If you think that the Post Office is just a place to buy stamps or pick up a form to renew your passports, you haven’t been in there in a while.

From the array of financial services now on offer you could be forgiven for thinking that the Post Office has turned into a bank, and with the launch of its new telephone landline service last week, it is assuming the role of a utility provider too.

It is only a little over two decades since the Post Office lost control of the bulk of the supply of phone services in Britain, when Margaret Thatcher split telecoms off from the high street and mail side of the business in 1981, and subsequently privatized the newly named British Telecom. Now the Post Office has returned to the telecoms market with its Homephone service, which it says it hopes will take a million of BT’s 21 million customers over the next three years, by undercutting its charges by up to 20 per cent.

As the controversy rages over branch closures – and there are more on the way – the Post Office, which is seen as being at the forefront in providing financial services for the ‘unbanked’, is pulling out all the stops to find a new role. Spokesman Jonathan Kinsella says: ‘The end of direct payments for pensions and benefits has seen a 40 per cent reduction in business, and we are having to find ways to come to terms with this. It has meant closing smaller and uneconomic outlets in order to provide a means for others to survive. In future we will see fewer branches doing more things.’

Recession Imminent If Rates Aren’t Cut

This will be ‘the year the luck runs out’ for homeowners, consumers and the Chancellor, leading economist Roger Bootle warns, predicting that the Bank of England will have to slash interest rates to stave off a recession.

In his quarterly economic health-check for accountant Deloitte and Touche, Bootle warns that as the housing market downturn accelerates, economic growth will slow to 2 per cent this year, from well over 3 per cent in 2004.

‘There are two big stimuli that are going to give out: the housing market, and government spending,’ he says. Gordon Brown’s cash splurge on schools and hospitals has helped to prop up the economy over recent years, but in last summer’s Spending Review the Treasury announced an easing in the pace of spending growth.

‘Even if you assume that there are no tax rises, the change is going to be devastating,’ says Bootle, who expects the Chancellor to exacerbate the slowdown next year by pushing up taxes.

He also believes unemployment could start to creep upwards as a knock-on effect of the rapid slowdown in the housing market, with layoffs in the construction sector, followed by other firms dependent on a buoyant housing market, such as retailers, hotels and restaurants.

With slowing government spending, falling house prices and rising unemployment, Bootle says the only cause for hope is the Bank of England will have room to cut interest rates rapidly. ‘I wouldn’t say that a recession is likely, but I wouldn’t dismiss it: you’ve got several key dangers, and they’re interactive, so the Bank has a major role here. You’ve got to hope that they could fend it off.’

Tax Increase Expected For Online Betting

Gordon Brown is to clamp down on internet betting exchanges and will demand that they pay more duty to Customs and Excise.

The Treasury will make its move after a National Audit report has revealed that out of £2.67 billion wagered on exchanges, a paltry £7.3 million was paid to Customs and Excise last year. This compares with £376m paid by bookmakers on bets worth close to £30bn.

Online exchanges allow punters to be the bookmaker and set odds on any event. They take commission on whoever wins each bet. But bookies have been up in arms because those who offer bets on exchanges give far more generous odds because of not paying any duty.

A Whitehall insider said the Treasury will move within months to close the loophole. A well-placed industry source added ‘The duty and the commission that exchanges make just doesn’t add up. It’s all pointing to the Treasury acting to stop this.’

Housing Jitters For Bank Of England

Bank of England policymakers are expected to leave interest rates at 4.75 per cent for the fifth successive month tomorrow as they watch the housing market downturn gather pace.

Interest rate doves on the nine-member Monetary Policy Committee surprised the City by mooting the idea of a rate cut at their December meeting for the first time since summer 2003; but analysts believe Bank governor Mervyn King will urge them to wait for more evidence.

‘Rates aren’t going to come down any time soon: they’ve wrestled to get the housing market and consumer borrowing under control and, having done that, they’re not going to rush to cut rates,’ says Ross Walker, UK economist at Royal Bank of Scotland. He added that a strong round of pay deals in the spring could fuel inflation and lead to one more rate rise.

John Butler, chief UK economist at HSBC, who is still forecasting at least one further increase in borrowing costs by the end of the year, said the MPC would be watching to see whether homeowners have begun to cut back on spending as they watch the price of their homes wobble.

‘I think it’s not too early to say that the housing market’s turned, and the turnaround in the summer was reminiscent of the early 1990s: the question is, does that mean we’re going to see a hard landing?’ he says.

At his last quarterly inflation briefing on the state of the economy, King pointed to evidence that the link between consumer spending and house prices had been broken, and a CBI survey suggesting retail sales were resilient in November seemed to support his point last week.

Latest housing market statistics underlined the case for the MPC to hold fire. Halifax says prices increased by 1.1 per cent in December, while Nationwide showed them falling by 0.2 per cent.

FSA Supplies Insurance Protection

People buying insurance through brokers will have the protection of the Financial Services Authority from the 14th January.

When the FSA takes over regulation that day, an estimated 36,000 insurance brokers will be bought into the regime and required , for instance, to provide ‘key facts’ information to buyers, including highlighting policy exclusions. The extended remit of the FSA will then include the sale, arranging and advice give on general insurance and protection insurance. Car dealers selling extended warranties will be regulated through the FSA – but, controversially, travel agents selling holiday insurance will be excluded.

Tough Christmas For High Street Retailers

Retailers will admit this week that Christmas was one of the toughest for years as the British Retail Consortium (BRC) publishes its monthly sales snap-shot.

Only the last few hours of trading and a brisk start to the seasonal sales rescued December from a sharp decline on the previous Christmas. The BRC is expected to report a relatively modest decline of no more that 2 per cent.

It is the latest glum news for retailers. With Sainsbury’s and Dixons reporting this week, the picture is unlikely to brighten. Both companies’ chief executives have been managing expectations downwards during the last two months.

Only Burberry, reporting on Wednesday, is a reasonably certain bright spot. Luxury goods analysts said that although fashion has been tricky, the designer spin-offs such as watches, fragrance and accessories performed well.

The overall tone was set last week as several iconic retailers were forced by a warning from the Financial Services Authority to report poorer than expected trading – and therefore anticipated profits – days earlier than they had planned. M&S was the biggest, reporting like-for-like sales down 6 per cent in the third quarter, and fulfilling predictions that clearing stock would cost dear.

21 Years of the FTSE 100 Index

With the new year barely a few days old, the FTSE 100 index was celebrating its 21st birthday. Born on the 3rd January 1984, many of the original elements look familiar. The biggest company is still BP and 44 of the original constituents survive, in some form or another, in today’s index. But its coming of age also highlights some of the dramatic changes in the stock market over the past two decades: the transformative effect of mergers and acquisitions, the growing internationalisation of the stock market, the importance of privatisations and the shift our economy from a manufacturing to a service-orientated one.

When it was launched the total value of its constituents was just over £100 billion and BP was worth £7.4bn; 21 years on, BP alone is worth £110bn and the market value of the 100 companies has risen over tenfold to £1,085bn.