Falling oil prices meant BP’s update today was never going to produce fireworks. The company has entered a phase of oil prices below $90 that are eroding margins and denting cash generation.

The impact was evident in the oil major’s Q3 update with replacement profit falling to $1.1bn compared to $3.6bn in the same quarter a year ago.

BP’s tough year was reinforced by results for the nine months ending September, showing replacement profit falling to $2.7bn from nearly $15bn in the same period in 2023.

Although the results didn’t make for pretty reading for investors, performance was ahead of analyst expectations, helping to contain any downside in the share price.

“Despite posting its worst quarter in almost four years, the numbers actually came in ahead of analysts’ expectations which should soften the blow for shareholders, with shares are down a modest 1% at time of writing,” said Adam Vettese, market analyst at investment platform eToro.

“Squeezed margins as well as weaker trading have been contributing factors. BP’s transformation strategy to green energy has come under scrutiny and will continue to be under the microscope following today’s update.”

Even though BP’s Q3 results were pretty dismal, some analysts remain upbeat about the stock’s outlook, highlighting exploration opportunities and a change in tack regarding the energy transition.

“Looking further ahead, bp is investing cleverly, pressing on with attractive exploration and development opportunities from Azerbaijan and Iraq through to the US Gulf,” said Derren Nathan, head of equity research, Hargreaves Lansdown.

“It’s also taken full ownership of both leading Brazilian biofuel producer Bunge Bionergia and its solar operation Lighsource bp. All in all, bp is taking a balanced approach to the energy transition, continuing to selectively add new sources of production whilst focussing on the higher-returning areas of renewable development. The current weakness in the shares represents something of an opportunity, but if net debt takes much longer to resume its downward trajectory investors are likely to remain cautious.”

On Tuesday, HSBC continued the trend of strong FTSE 100 banking earnings by posting Q3 results that exceeded analyst expectations.

After years of slow activity following the pandemic, investors will be delighted to see HSBC enjoy the impact of Chinese stimulus.

Adjusted profit before tax came in at $8.7bn, significantly higher than the $7.7bn expected by investors.

The bank’s diversification of operations helped propel earnings higher. Wealth management and markets activities played a major part in increasing income. Unlike other FTSE 100 banks, HSBC isn’t reliant on traditional lending and deposits to generate income, and it’s certainly not reliant on the UK.

HSBC’s net interest income did fall during the period, but the depth of the company’s operations and geographical diversification shone through.

Uncertainty around China’s economic health has raised questions about financial services in the country and has been the source of disappointment in prior earnings updates. 

It is a very different story this time around. Chinese stimulus is driving demand for wealth management products, and HSBC has reduced charges to their Chinese real estate business. The Chinese property sector has been a significant concern for investors, who will be glad to see some signs of stabilisation.

The upbeat report sent HSBC shares higher in Hong Kong overnight and the sentiment followed through to trade in London where shares were 3.5% higher at the time of writing.

“Chinese stimulus increased client activity for the wealth division, and strong trading activity in the foreign exchange, equity and debt markets helped propel investment banking fees higher – akin to what we saw with the major US banks,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.

“The new buyback, while expected, will still be taken as a positive and speaks to the work HSBC has done in recent times to optimise the capital structure and strip out some non-core assets. Looking ahead, net interest income will come under more scrutiny as rates in the US no longer act as a tailwind, and loan growth looks to be a challenge.”

The FTSE 100 was feeling the pressure of lower oil prices on Monday as oil prices sank on hopes of a step down in tensions in the Middle East after Israel launched a reserved retaliatory attack against Iran over the weekend.

Oil prices sank over 4% at the beginning of trade on Monday as traders reacted to the first sign of restraint in attacks back and forth between Israel and Iran, raising hopes of a broader de-escalation in the conflict.

“The Israeli attack, which avoided vital facilities such as nuclear and oil sites in Iran, significantly reduced the uncertainty that had reigned in the previous weeks,” said Antonio Ernesto Di Giacomo, Senior Market Analyst at XS.com.

“In response, Brent prices stabilized around $73 per barrel, while West Texas Intermediate (WTI) crude dropped to the $68 per barrel range. This downward price movement suggests that investors found reasons to reduce their risk perception in the attack, given that Iran’s strategic infrastructures were not directly affected.”

Lower oil prices ultimately drove the FTSE 100 on Monday, with oil majors Shell and BP shaving off a considerable number of points from the index as they both fell over 2%. However, a midday rally saw the index turn positive as we entered afternoon trade.

The negative mood in London was compounded by another 3% drop in Lloyds shares. Lloyds was down again following an unfavourable Court of Appeal ruling on Friday that has potentially opened the doors to billions in redress for motor financing customers.

“Lloyds was in damage control mode on Monday morning after Friday’s ruling on motor finance commission arrangements at the Court of Appeal potentially broadened the scope of the scandal,” said Danni Hewson, head of financial analysis at AJ Bell.

“This will increase nervousness ahead of the FCA’s own probe into the issue and potentially prolong the agony for Lloyds and the other names affected. If the regulator does adopt a wider lens thanks to this latest ruling then the results of its investigation may well come in later than May, which was when a judgement had been expected.

“For now, Lloyds has put out what is very much a holding statement, with the shares only showing limited damage this morning after a more meaningful slump on Friday afternoon. It will be telling to see if the company proactively increases any provisions made for compensating customers, although given the remaining uncertainties quantifying the impact will be tricky.”

Budget

Investors will be gearing up for this week’s budget and a raft of measures that could curtail growth in the near term. There is an argument the pessimism around the budget is already built into equity prices but the tarders will be cautious going into the event given the reaction similar fiscal announcements have had in recent years.

The FTSE 100 has traded in a range of around 200 points since the beginning of August, with investors showing little appetite to make big bets on UK stocks that could take the index to a fresh all-time high, but at the same time, investors see value in their exposure to the defensive corners of the market, providing support for London’s flagship index.

The budget has the potential to provide a catalyst for the FTSE 100 to break this range.

Lloyds shares sank at the end of last week as investors dumped the stocks following a ruling by the Court of Appeal against Lloyds, potentially paving the way for billions of pounds in redress.

Lloyds has already set aside £450m to meet the demands of any potential litigation. The drop at the end of last week would have been a mix of disappointment that the provision for redress now looks unlikely to be reversed in the coming periods and out and out of fear that Lloyds could have to stump up far more. 

The Court of Appeal ruling announced on Friday could have set the wheels in motion for a multi-billion pound redress scheme. The court ruled that car finance providers must be transparent in disclosing fees amid complaints from consumers about high commissions.

The uncertainty surrounding Lloyds’s potential liability has taken shares from 62p on Friday to beneath 57p in the very early minutes of Monday’s trade.

This is a sharp drop for a share price that has been in a steady uptrend for most of 2024.

While the drop may draw some investors into buying the dip, there are a number of other considerations for Lloyds.

By all accounts, Lloyds’ Q3 update was fantastic. Impairments due to bad debts were lower than analysts had predicted, meaning profits were higher than expected, and the market gave Lloyds its stamp of approval by taking shares to the highest levels since 2019 last week.

However, lower-than-expected impairment charges masked falling income, which is likely to persist in the coming quarters. Lloyd’s top line is inextricably linked to interest rates and the net interest margins it can generate from lending and deposits activity.

The Bank of England will likely cut rates again in the coming months, adding further pressure to net interest margins. Lloyds will have to rely on robust demand for mortgages and other lending products to maintain its income.

A softening economic backdrop will raise concerns about this being achieved, given the UK economy produced very little growth in Q3 and the new Labour government has so far failed to promote any growth or optimism around the UK economy. By all accounts, it has done the complete opposite.

Motor financing redress is likely to be a slow-moving risk that could weigh on Lloyds shares for the foreseeable future, but the next major catalyst for the Lloyds share price is this week’s budget and perceptions of whether any measures announced by Labour will be supportive of lending activities and the broader economy.

Following up from last Thursday’s Q3 Trading Update issued by Foxtons Group (LON:FOXT), I would rate the shares of London’s leading estate and lettings agency as a Buy. 

Rothschild Called In 

I last featured the company in early May this year, when it was noted that the group had called in Rothschild merger and acquisition bankers to work alongside its brokers Deutsche Numis and Singer Capital Markets, amid increasing pressure from shareholders to sell itself by the end of this year. 

That move was subsequent to its largest shareholder publicly calling on the board of the estate agency group to find a purchaser. 

Converium Capital, the Canadian investment company, which owns about 5.3% of the equity, together with the UK-based Milkwood Capital, that owns another 5%, had both stated that they wanted Foxtons to find a buyer for the business. 

The Sunday Times later suggested that Dexters, Platinum Equity – the US owner of the Leaders Romans Group – and Emeria, a European private equity-owned property business that last year bought Chestertons, could well have been among the firms keen to buy Foxtons. 

The Business 

Established in 1981, Foxtons is London’s leading estate agency and largest lettings agency brand, with a portfolio of over 28,000 tenancies.  

The group operates from a network of interconnected, single-brand branches and offers a range of residential property services across three business segments: Lettings, Sales and Financial Services. 

The company’s strategy is to accelerate growth and deliver against its medium-term target of £25m to £30m adjusted operating profit, by focusing on non-cyclical and recurring revenues from Lettings and Financial Services refinance activities, supplemented by market share growth in Sales. 

Q3 Management Comment 

CEO Guy Gittins stated that: 

“We have delivered our third consecutive quarter of growth, with Q3 revenues up 8% to £47.4m, and year-to-date revenue up 10% to £125.9m, as the momentum we have built across the business has been maintained, and we continue to cement our position as London’s largest lettings and sales agency brand. 

Continued market share growth, enabled by a focus on improving training, negotiator tenure, culture and our data and technology capabilities, and supported by early signs of market recovery, drove Q3 Sales revenue up 36%.  

This growth was supported by a resilient performance in Lettings, which continues to provide a valuable stream of recurring and non-cyclical revenues. 

We enter the final quarter with optimism: our sales agreed pipeline is 23% higher than this time last year, sales volumes in our markets continue to recover, and we are well placed to continue to unlock the value within our business.  

Our balance sheet and cash flow remain strong which will continue to support our growth and value creation initiatives, including both organic investments and synergistic lettings acquisitions.  

We are on-track to deliver increased profitability in 2024, in line with consensus, and we continue to make progress towards our medium-term target of £25m to £30m adjusted operating profit.” 

Analyst Views  

Analyst Greg Poulton at Singer Capital Markets rates the group’s shares as a Buy, with a raised Price Objective of 94p (88p). 

He is now estimating current year revenues of £160.6m, adjusted pe-tax profits of £17.0m, 4.2p earnings and a 1.10p dividend per share. 

Over the next two years to end 2026 he sees revenues rising to £177.6m, £25.3m profits, 5.9p earnings and a 1.50p per share dividend. 

Elsewhere, analyst Andy Murphy, at Edison Investment Research, has a valuation on the group’s shares of 134p. 

His estimates for 2024 are £159.7m revenues, £19.6m profits, 3.7p earnings and a 1.3p per share dividend. 

For 2025 he foresees £168.9m revenues, £22.9m profits, 4.5p earnings and 1.6p dividend. 

My View – Still Looking For 80p A Share 

I am still interested in finding out just how its brokers and Rothschilds have been faring in attempting to get FOXT a much better rating than at present. 

Did they manage to placate the two anxious institutions? 

Have they convinced them that Guy Gittins, who was only appointed a couple of years ago, should be given a clear field to pursue and achieve his strategy? 

The shares are currently trading at around the 60p level, at which the whole group is valued at some £180m. 

Even if a bidder does not emerge, I still see them at 80p within months.