FTSE lifted by oil heavyweights as crude prices surge on OPEC cut, Cineworld equity holders braced for wipe-out

“The world needed a spike in oil prices like a hole in the head. Just as one of the pinch points in the global economy had started to ease, Saudi Arabia and its counterparts in OPEC have unveiled a surprise output cut,” says Danni Hewson, head of financial analysis at AJ Bell.

“The decision by the oil producers’ cartel, unusually taken outside of any officially scheduled meeting, represents a flexing of its muscles and potentially a pre-emptive move as it anticipates a drop-off in crude demand relating to the collapse of SVB and ensuing banking crisis.

“It is this crisis which has helped box central banks in when it comes to their ability to control inflation as they have to think about their role in preserving financial stability too.

“Rising oil prices imply higher costs of energy, transportation and other areas like plastic. The heavy exposure of the FTSE 100 to energy and resources stocks is looking like an attribute again as index heavyweights BP and Shell help lift the index. It is telling that the more domestic focused and diversified FTSE 250 is down a smidge on Monday.

“Manufacturing PMI figures from the US later today and jobs numbers at the end of the week will be closely monitored as investors seek to work out what exactly the Federal Reserve is going to do when confronted with this mess.”

Cineworld

“Cineworld’s shareholders had been given plenty of warning their investment in the business could be wiped out by a debt restructuring and this looks like it will soon happen. The company’s lenders are going to gain control through a debt for equity swap and a rights issue, giving Cineworld yet another throw of the dice to try and sort out its finances.

“Keeping the US and UK operations and only potentially selling its Eastern European and Israeli sites will streamline the group and put it in a better position to ride the recovery in the cinema industry – if it comes.

“That’s a big ‘if’ as competition from streaming platforms has become intense and film-lovers are increasingly happy to watch new releases at home. It helps that gigantic flatscreen TVs are much more affordable these days, as are speakers, so it is easy to create a good cinema experience in the home.

“Assuming the financial restructuring goes through, expect a change in the top management to bring a fresh perspective to the business. Lenders will want to see the value of the equity increase over time and the existing management team has already had its chance to repair things, and that hasn’t gone to plan. Therefore, it’s time for someone else to have a go.

“Cinemas have typically relied on the film slate to drive their business, meaning that as long as the foyer and auditoriums were tidy, customers would walk through its doors. Now the industry is going to have to offer something extra to persuade people to go the flicks, which means there will have to be some hard decisions made to make cinemas more appealing such as ticket pricing (make it cheaper?) and comfort (make every seat a recliner?).

“But that might be the second phase of Cineworld’s recovery. First would be to slim down the size of the estate to focus on the best performing sites and only then think about what to do next.”

These articles are for information purposes only and are not a personal recommendation or advice.