Friday, October 31, 2014

Richest Are Bullish on U.S. as Family Offices Open Outposts

As the U.S. powers the global economic expansion in its fifth year, the world’s rich are counting on American companies to help increase their fortunes.
At least a dozen family offices, with fortunes made in EuropeAsia andSouth America, have opened U.S. outposts in the past two years or are making direct investments in corporations from Silicon Valley to the East Coast. Their view is that the Federal Reserve’s aggressive monetary easing, a shale oil boom that’s lowered energy costs, and improving corporate balance sheets give the world’s largest economy an edge over other regions.
Peca Ltd., a London-based firm started in the 1990s by a family that made its wealth mainly in financial services, has made about two-thirds of its private-equity and venture capital investments in the U.S. while reducing investments in Europe, said Anselm Adams, who oversees the firm’s alternative investments. A German family that founded an automotive company opened an investment office in New York this year to find deals in the automobile, textile or luxury industries, according to a person familiar with the matter, who asked for anonymity citing a lack of authorization to discuss the firm.
“They are looking for diversification and more exposure to the U.S.,” Patrick McCloskey, managing partner at Aeterna Capital Partners, said of the firms. “Many family groups are trying to manufacture yield in a very low-interest-rate environment and are looking for unique and customized ways to do so.”

$4 Trillion

McCloskey’s firm last year opened a New York office for a rich European family looking for deals in the U.S. In September, he helped his client finance a video-distribution company with a loan that pays the London interbank offered rate plus as much as 11 percent.
Average family office assets under management globally and total family net worth.
Average family office assets under management globally and total family net worth.
Family offices manage $4 trillion in assets globally, about 55 percent of which is based outside ofNorth America, according to a 2014 study by London-based researcher Campden Wealth. Affluence has grown fastest since 2013 in the U.K., Korea and Denmark, according to a report this month by Credit Suisse Group AG. (CSGN)
The U.S., where growth accelerated in the third quarter to cap its strongest six months in more than a decade, is “a big bright spot in the world,” said Stephen Cecchetti, professor of international economics at Brandeis International Business School in Waltham, Massachusetts. As the Fed winds down unprecedented stimulus, the European Central Bank is contemplating its own quantitative-easing program to tackle the weakest inflation in five years, and Japan is continuing purchases.

Venture Deals

Peca has been attracted to venture-capital deals in the U.S., said Adams, who declined to name the family he works for, citing privacy reasons. The firm has taken stakes this year in The Bouqs Co., an online flower-delivery business, and Circa, a mobile news service, Adams said. Both are closely held companies based in California.
The family office generally invests $1 million to $3 million, working alongside private-equity firms rather than through funds because it pays no fees or carried interest on co-investments.
“One of the things we’ve been very active in, in the last two years, is the venture capital scene,” Adams said in an interview via Skype.
McCloskey’s firm usually seeks equity and lending transactions in companies with enterprise values of $5 million to $100 million, he said, declining to name the family sponsoring him for privacy reasons.

Sideline Cash

Aeterna helped finance RLJ Entertainment Inc. (RLJE), a Silver Spring, Maryland-based video content distributor founded by Robert L. Johnson, because it liked the business, management and risk-reward profile, McCloskey said. Four other lenders were involved in the $70 million deal, according to an RLJ filing.
“There’s so much cash on the sidelines ready to be put to work by families that took money out in the financial crisis or that have operating businesses generating a lot of income that they haven’t put in the market yet,” said John Benevides, president of Chicago-based CTC myCFO LLC, which advises family offices and is a unit of the Bank of Montreal. “They are giving us a shopping list.”
That capital has made finding bargains a challenge. Price multiples for U.S. private-equity deals are the highest since 2007, and some transactions are being done with less leverage as more equity is being contributed to the average deal, said Andrew Lee, head of alternative investments for the chief investment office at UBS AG (UBSN)’s wealth-management unit, which oversees $1 trillion. Those factors may make it harder to see returns as attractive as in the recent past, he said.

‘More Cautious’

“We’re more cautious on allocating aggressively to U.S.- focused private-equity opportunities,” Lee said. “On a one-off basis there may be situations that may make sense.”
Valuations have also risen in U.S. venture-capital deals, particularly for later-stage companies, Lee said.
One area where family offices find opportunities are private companies looking for a new, private owner, said Francois de Visscher, whose Greenwich, Connecticut-based firm advises single family offices and family-owned businesses.
Every day, about 10,000 Americans born between 1946 and 1964 reach retirement age. Many of them have built businesses, don’t have an heir to take over and want to sell, said Robert Elliott, vice chairman at Market Street Trust Co., a multi-family office established to manage the wealth of the Houghtons, founders of glassmaker Corning Inc.
The U.S. is “a good hunting ground, particularly with this generational shift,” Elliott said in an interview.

Private Sales

More than 40 percent of the 330 members in the Family Office Exchange are buying at least one private company a year, said Sara Hamilton, founder of the Chicago-based group.
The deals are part of a larger trend among family offices to find investments themselves. The number of family offices seeking equity stakes or lending opportunities directly grew 45 percent this year at Axial, an online network that connects companies to capital, said Peter Lehrman, the New York-based firm’s CEO.
“We get at least one call a month from a family company that is ready to sell and wants to sell to another like-minded family instead of a private-equity firm,” said Hamilton, whose group is a network of private families around the world with an average of $450 million in investable assets.
The New York firm that’s been investing money for the German automotive family was in talks earlier this year to buy a family-owned business based in California, said the person familiar. The family is looking for public or private companies in the automobile, textile or luxury industries with enterprise values between $250 million and $300 million. The transaction fell through, the person said, because of the seller’s lack of speed in closing the deal.
“It doesn’t come without risks,” Aeterna’s McCloskey said of international investments. “It’s easier said than done.”
(Source: Bloomberg)

Harley-Davidson woos affluent young Indians with bike culture

Harley-Davidson Inc, battling upstart competitors in its traditional markets, says it is betting on India's young and affluent urbanites to help establish a "leisure riding" culture there and boost sales of its first new bike in over a decade.
With Lynyrd Skynyrd and Deep Purple playing in the background, the iconic United States motorcycle company on Thursday launched three new bikes in India, a country more associated with pot holes and traffic snarl-ups than open roads.
"I think there's a lot of people (in India) who are enthusiastic, who are riders at heart, and are now seeing an opportunity to enter into this lifestyle. It is much more accessible," India Managing Director Anoop Prakash told Reuters on the sidelines.
The bikes launched included the company's costliest offering in India to date, a limited edition CVO Limited, priced at 4.9 million rupees. That is the equivalent of a BMW 5 Series sedan or almost seven decades of pay for many families in country where average income is closer to $1,200 a year.
But Prakash, a former U.S. Marine, said he was confident the brand -- which Harley nourishes in India with rock music festivals and bike rallies -- would prove attractive to aspirational young Indians, for whom a motorcycle is more than simply the cheapest form of motorised transport.
India is the world's largest motorcycle market after China, but the roads are packed with cheaper models. Makers of high-end motorcycles, from Ducati to Yamaha Motor, are only just breaking into the market.
"We are reaching out to a lot of younger riders," Prakash said.
Harley Davidson has suffered recalls that tarnished the roll-out of the "Street," its first entirely new bike in more than a decade and its first Harley-badged lightweight motorcycle since the 1970s.
But in India, its stripped-down 'Street' series launched earlier this year at $7,000 has helped it more than double sales in the six months through September, according to data from the Society of Indian Automobile Manufacturers.
"We're looking at the establishment of a long-term leisure riding culture and doing it the Harley-Davidson way," he said.

Harley, which entered India five years ago, has since set up its own assembly line in the country. Earlier this year it set up its first manufacturing facility outside its parent market in northern India.
(Source: Reuters)

Thursday, October 30, 2014

Why Oil Prices Went Down So Far So Fast

The reasons oil prices started sliding in June were hiding in plain sight: growth in U.S. production, sputtering demand from Europe and China, Mideast violence that threatened to disrupt supplies and never did.
After three-and-a-half months of slow decline, the tipping point for a steeper drop came on Oct. 1, said Ray Carbone, president of broker Paramount Options Inc. That’s when Saudi Arabia cut prices for its biggest customers. The move signaled that the world’s largest exporter would rather defend its market share than prop up prices.
“That, for me, was the giveaway,” Carbone said in an Oct. 28 phone interview from his New York office. “Once it started going, it was relentless.”
The 29 percent drop since June of the international price caught traders and forecasters by surprise. After a steady buildup of supply and weakening demand, the outbreak of an OPEC price war is casting doubt on investments in new oil resources while helping the global economy, keeping inflation in check and giving motorists a break at the pump.
Brent crude, the global benchmark, declined to $82.60 a barrel on Oct. 16, the lowest in almost four years, from $115.71 on June 19. In the U.S., West Texas Intermediate touched $79.44 on Oct. 27, the lowest since June 2012. U.S. regular unleaded gasoline is averaging close to a four-year low of $3.01 a gallon nationwide, according to AAA.  
The bear market exceeded the decline anticipated in exchange-traded futures, used by producers to hedge price swings. As recently as a month ago, Brent for delivery in November traded at $97.20 a barrel, 12 percent above the current price.

Following Market

OPEC Secretary-General Abdalla el-Badri denied the existence of a price war. “Our countries are following the market,” he said yesterday at the Oil & Money conference in London. “People are selling according to the market price.”
Officials from the Saudi oil ministry could not be reached for comment after hours.
Prices stayed higher earlier this year as traders focused on the risk that armed conflicts in Libya,Iraq and Ukraine could interfere with oil production, according to Jeff Grossman, president of New York-based BRG Brokerage. The disruptions never materialized.
“This one caught a few people off guard because they were still worried about some of these geopolitical things that were happening all over the world that never came to fruition,” said Grossman, a New York Mercantile Exchange floor trader. “We probably never should have been over $100.”

Libya’s Output

Libya’s production tripled since June to about 900,000 barrels a day, still 40 percent lower than two years ago, according to an official with direct knowledge of the matter. War hasn’t stopped production in Iraq, which is pumping 3.1 million barrels a day, within 10 percent of February’s 13-year high. The Organization of Petroleum Exporting Countries boosted September production to an 11-month high of 30.9 million barrels a day.
London-based Barclays Plc cut its oil-price forecasts on Oct. 28 for the second time this month, citing a global surplus. Brent will average $93 a barrel in 2015, while WTI averages $85, down from previous estimates of $96 and $89, respectively, the bank said.
The revision follows Goldman Sachs Group Inc. cutting its 2015 forecasts a day earlier, to $85 a barrel from $100 for Brent, and to $75 a barrel from $90 for WTI. Brent will average $99.65 a barrel in 2015, down from a September prediction of $105.50, according to the average of 46 analyst estimates compiled by Bloomberg.

Horizontal Drilling

OPEC faces increasing competition from the U.S., where technological breakthroughs -- hydraulic fracturing and horizontal drilling -- have enabled domestic production to replace imports at a historic pace. Output surged 14 percent in the past year to 8.97 million barrels a day, the highest since the U.S. Energy Information Administration’s weekly estimates began in 1982.
Yet U.S. production has been booming for years now without setting off a bear market, said Katherine Spector, an analyst at CIBC World Markets Corp. What changed this summer was macroeconomic data indicating weak demand in Europe and Asia, she said in an Oct. 16 report.
The International Monetary fund this month cut its forecasts for global growth in 2015 to 3.8 percent from 4 percent. The Paris-based International Energy Agency predicted world oil consumption would expand at the slowest pace since 2009 after cutting its forecast in October for the fourth time in a row, to half what it predicted in June.

Price Cut

On Oct. 1, Saudi Arabia lowered prices on its crude exports to Asia to the lowest in more than five years. Iraq and Iran followed. Frankfurt-based Commerzbank AG called it a price war.
Brent crude for December settlement fell 72 cents to $86.40 a barrel on the ICE Futures Europe exchange as of 10:47 a.m. in London. West Texas Intermediate lost 71 cents to $81.49.
“That’s where the perception of their action changed overnight,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “They must have been aware how the market would interpret that when they’d been such a guarantor of stable prices for so long.”
The plunge does not accurately reflect the balance between oil supply and demand, OPEC’s El-Badri said at the London conference yesterday.

Growing Demand

“We see that demand is still growing, that supply is also growing, but the magnitude in the increase in supply does not really reflect this 25 percent change in the market,” he said. “Unfortunately, everybody is panicking.”
As Saudi Arabia tolerates lower prices to protect its market share, the kingdom is also testing the level at which higher-cost U.S. production remains profitable, according to the IEA. As much as 50 percent of shale oil is uneconomic at current prices, El-Badri said. New York-based Sanford C. Bernstein & Co. estimates about a third of U.S. production from shale loses money at $80 a barrel.
“We think there’s a lot of economic oil at $75, economic meaning we earn 15 percent, 16 percent, 17 percent returns,” Stephen Chazen, chief executive officer of Houston-based Occidental Petroleum Corp. (OXY), said during a conference call with analysts Oct. 23.
Other U.S. drillers have already altered plans due to lower prices.

Consumer Celebration

Dallas-based Exco Resources Inc. (XCO) will defer some drilling in North Louisiana because of lower prices, President Harold Hickey said on a conference call yesterday.
“We’ve used $100 Brent as the basis for our plans even as Brent has averaged nearly $110 for the last three years,” John Hess, New York-based Hess Corp. (HES)’s billionaire CEO, said on a conference call yesterday. “However, with Brent now at approximately $87 per barrel, we are reviewing our plans and actions that we might take in a lower price environment.”
Al Walker, chairman and CEO of The Woodlands, Texas-based Anadarko Petroleum Corp. (APC), said on a conference call yesterday that the company will “watch this for a few more months and when we announce our capital plans in March, we’ll have a much better idea of what we expect.”
Consumers, on the other hand, have cause to celebrate. A 20 percent drop from the average oil price of the past three years amounts to a $1.1 trillion annual stimulus to the world economy, Citigroup Inc. estimates. In the U.S., gasoline continuing at the current level would add 0.4 percent to annual economic growth, according to Joseph LaVorgna, New York-based chief U.S. economist at Deutsche Bank Securities Inc.
“Historically, when price changes kick in, they are usually more violent than the forecasts,” said Torbjoern Kjus, senior oil market analyst at DNB ASA in Oslo. “It’s difficult for analysts to see such a massive drop, as you will look like a conspiracy theorist.”
Some analysts do, however, see a price rebound. Brent will climb to as much as $100 a barrel next year, according to London-based Standard Chartered Plc, Sanford C. Bernstein and Barclays.
(Source: Bloomberg)

Wednesday, October 29, 2014

Norway’s $860 Billion Wealth Fund Bets Big on Modi’s India

Norway’s sovereign wealth fund, the world’s largest, will increase its holdings “significantly” in India as Prime Minister Narendra Modi opens Asia’s third-largest economy to investments and competition.
The fund today revealed that it raised its holdings of Indian bonds and stocks to 0.9 percent of its fixed-income and equities portfolios, as part of a broader plan to increase its presence in emerging markets and generate bigger returns.
“India is one of those markets where you should expect that we will continue to increase our investments over time, significantly,” Yngve Slyngstad, chief executive officer of the Oslo-based fund, said in an interview after a press conference today. “Relative to the size of the economy our investments are smaller than you would expect.”
Foreign investors are increasing investments in India at a faster pace than in any of the seven other Asian markets tracked by Bloomberg. The Sensex index has jumped 28 percent this year, rallying after Modi in May won elections by the biggest margin in three decades on promises to create more jobs and lift growth. Since taking power, Modi has shifted toward more market-based energy pricing, allowed more foreign investment in the defense industry and pushed to revive the manufacturing sector.
“The changes that we have seen have given us more confidence that we will have good investment potential in the coming years,” Slyngstad said. “We will continue to increase our investments there, both on the fixed-income side and in regards to our company investments.”

Indian Growth

At the same time the fund is being blocked from investing more in China and is now again seeking to increase the allocation it has been allotted, according to Slyngstad.
India’s $1.9 trillion economy will grow 5.5 percent in the fiscal year through March 2015, its central bank predicts. While that would exceed the previous period’s 4.7 percent, it’s still slower than the average 8.7 percent pace during the period in 2006 to 2010. Standard & Poor’s upgraded its outlook for India’s credit rating last month, citing reduced price pressures and a government plan to narrow the budget deficit to a seven-year low of 4.1 percent of gross domestic product.
The Government Pension Fund Global, the wealth fund’s official name, rose 0.1 percent in the third quarter, its smallest return since mid-2013, it said today.

Bond Shifts

Slyngstad warned it will become more difficult for the fund to generate high returns after interest rates plunged amid sluggish global economic growth. The fund lost 4.3 percent last quarter on its stock holdings in Europe, which represented 43.6 percent of its equity portfolio. Its North American stocks gained 3.4 percent, while equity holdings in Asia and Oceania rose 2.3 percent.
The biggest government bond increases in the quarter were in Japanese, Indian and Austrian bonds, while the biggest decreases were in government bonds issued by the U.S., France andGermany, the fund said.
Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company.
(Source: Bloomberg)

Monday, October 27, 2014

India’s ONGC plans $180bn spending spree

India’s Oil and Natural Gas Corporation plans to launch a “huge” global acquisition spree, as the state-backed energy flagship delivers an aggressive Rs11tn ($180bn) investment push to take on Chinese rivals and drive foreign production up sevenfold by 2030.
Dinesh Sarraf, ONGC chairman, said that the group aimed to raise its international oil and gas output from 8.5m tonnes of oil and oil equivalent last year to 60m tonnes over that period, as India prepares to meet projections of rapidly rising domestic energy demand.

The foreign expansion is likely to see India’s largest industrial company by market capitalisation ramp up operations in almost all of the world’s energy-producing regions.
“The kind of investments which we will require is huge,” Mr Sarraf told the Financial Times. “Our goals are so high we can’t pick and choose [parts of the world]; it will come from virtually everywhere.”
ONGC has historically been viewed as a conservative, midsized global energy player, held back by cautious management and risk-averse political leadership in New Delhi. It also has often lost out to more aggressive state-backed Chinese energy groups in the race to snap up foreign oil and gasfields, analysts say.
Recent years have seen a markedly bolder approach, however, following the launch last year of a strategy known as “Perspective 2030”, designed to bolster overseas operations. ONGC has invested about $7bn since mid-2013 to acquire foreign assets in countries such as Mozambique and Brazil.
Mr Sarraf pledged that this global expansion would now accelerate, potentially aided by a rapid recent fall in global oil prices. “We see this as a time we can make certain deals,” he said. “Prices are lower, and so some [new] deals may be available.”
India is set to overtake China to become the largest source of growth in global oil demand by 2020, according to the International Energy Agency. Almost of all of this increase will be met via imports, given India’s limited domestic production.  
ONGC’s plans have been helped by recent economic reforms launched by India’s prime minister Narendra Modi, who last week moved to deregulate diesel controls and increase natural gas prices, boosting the energy explorer’s share price.
Later this year Mr Modi also plans to sell off a further 5 per cent stake in ONGC, which is 69 per cent-owned by India’s government, raising in the region of $3bn that could be used for further acquisitions around the globe.
Mr Sarraf confirmed that ONGC was considering an offer from Rosneft of Russia to invest in both its Vankor and Yurubcheno-Tokhomskoye oilfields in eastern Siberia, along with other potential assets in the Arctic region.
ONGC plans to build up its presence elsewhere in the former Soviet Union, he said. Expansion was also likely in Africa, in particular Angola and Nigeria, alongside large swaths of Latin America, and in both the US and Canada, where ONGC would consider assets ranging from shale gas to tar sands.
Mr Sarraf took over as ONGC’s chairman earlier this year, having previously led the group's overseas arm, ONGC Videsh, and held positions in various other state-backed energy groups, including explorer Oil India.
ONGC generated revenues of Rs1.8tn ($2bn) during its past financial year, up 7 per cent from the previous year, but has struggled to raise overall production levels. Output from Indian oil and gasfields has declined over the past decade, including during the past financial year.
But Mr Sarraf rejected concerns that ONGC’s expansion target would prove unrealistic, given its limited success increasing production and a shortage of appropriately-priced foreign assets. “It is very difficult. But it is achievable,” he said.
The group also has “full political support” from Mr Modi’s government to make aggressive bids against foreign rivals. “Now all of the world is our competitors,” he said. “Earlier it used to only be the Chinese; now it is Thailand, Malaysia, even the IOCs [international oil companies].”
Mr Sarraf cautioned that ONGC would not follow the path taken by China’s energy giants, however, who he suggested had secured global assets by paying inflated prices.
“Whether we are more successful, or the Chinese are more successful, that is a matter of perception,” he said. “If success is defined in terms of making rational decisions, I would say we are more successful.”

Saturday, October 25, 2014

China steel now cheap as cabbage

Plunging demand for steel in China has pushed prices in some markets as low as the cost of cabbage, as worries mount that annual steel consumption may shrink for the first time in 19 years.
Some grades of rebar, a steel product widely used in construction, fell to Rmb2,600 ($424) a tonne in northern Chinese markets this week, according to prices on industry website SteelHome – equivalent to the retail price of cabbage.

Chinese steel consumption has been bolstered for years by the boom in demand for the refrigerators, supermarkets, train wagons and greenhouses that now allow Beijingers to enjoy green vegetables all winter long. But that demand is falling sharply as China’s economic growth peaks.
Meanwhile, cabbage is not the ubiquitous product it one was. Trucks laden with the vegetable no longer lumber into Beijing in the crisp autumn days, and few residents stack them in their stairwells in preparation for the cold winter.
The drop in steel demand “is a long-term trend”, said Li Xinchuang of the China Iron and Steel Association, which represents the nation’s largest mills. CISA data show steel consumption dropped in both July and August compared with the previous year. Mr Li said the decline continued in September.
The fall in steel consumption in the third quarter largely reflects slower housing construction. A similar drop this quarter would make 2014 the first year consumption has shrunk since 1995, when the Chinese economy was recovering from a bout of inflation.
“All the indicators we look at show the fourth-quarter economic recovery is unlikely to be strong,” said Song Chunlei, vice-director of steel consultancy LGMI in Beijing. He said mills in Tangshan, the heart of the Chinese steel industry, are already planning output cuts for the rest of the year.
Gross domestic product data for the third quarter, to be released next week, are expected to show the weakest quarter since early 2009, when China was still stung by the global financial crisis. But a shift in economic activity to the less steel-intensive services sector will mean steel and other heavy industries will underperform the broader economy.
Ballooning steel exports are another sign that China’s mills are producing more than the country can consume. Exports reached a record 8.5m tonnes last month as traders sought profits in other markets. Steel exports for the first nine months of the year are up 39 per cent.
Steadily dropping global prices for iron ore, the main ingredient in steel production, have also lowered costs for mills and allowed them to sell steel more cheaply. Average steel prices in China have dropped 13 per cent this year.

Falling oil price raises questions on viability of shale

Plunging share prices for US oil and gas companies in recent days have highlighted a potentially decisive factor in the looming crude price war: investor confidence.
On Monday, shares in Goodrich Petroleum, a small oil and gas producer, fell 30 per cent, making it the day’s most spectacular casualty, but much larger companies were hit too. Continental Resources was off 5.1 per cent, Hess off 5.8 per cent and EOG Resources off 6.8 per cent. Most of them recovered a little on Tuesday morning, and Goodrich was up more than 7 per cent, but all were below the levels at which they had started the week.

After three years of what was described by Christof Rühl, former chief economist of BP, as an “eerie calm” in the oil market, volatility is back.
Saudi Arabia’s apparent willingness to let crude prices fall to damage its competitors will test the capital markets’ support for US producers. It is shaping up to be the North American industry’s toughest examination since the shale revolution started to revive US oil production in 2009.
Bob McNally, a former White House official and now head of Rapidan Group, a Washington-based consultancy, argues that rather than reining in production to support oil prices at about $100 per barrel, Saudi Arabia can easily afford to let them drop for a while.
A rough calculation indicates Saudi Arabia would lose only a fraction – between $10bn and $20bn – of its nearly $750bn in foreign exchange reserves were it to let oil prices fall to $80 per barrel for a year, he says.
“When it’s needed, the Saudis are not going to be the ones that cut production,” adds Mr McNally.
“Recent comments by Saudi officials imply that if anyone has to cut, it has to be the Americans.”
With internationally traded Brent crude at below $88 a barrel – a four-year low – and US benchmark West Texas Intermediate at below $85, down from over $107 in June, most US shale production is still profitable, analysts say.
US oil chart
Wood Mackenzie, the consultancy, estimates the majority of US shale production will break even at $75. The International Energy Agency said on Tuesday steeper drops in the price of oil are needed for US shale and other unconventional energy production to take a meaningful hit.
If prices continue to fall, however, the pressure on the industry will grow. The smaller and midsized oil and gas companies that led the shale revolution have been running at a cash flow deficit for years. Capital spending has exceeded companies’ operating cash flows.
The steep decline in production from shale wells – it can drop 60 per cent or more in the first year – means that companies have to keep drilling merely to maintain their output, let alone increase it.

Nokia’s broadband gamble pays off

Nokia’s gamble on telecoms equipment following the sale of its handset division to Microsoft last year is paying off, reporting its first year-on-year sales increase in more than three years in the third quarter.
However, the Finnish technology group suffered a pre-tax loss of €834m, compared with a profit of €202m in the same period last year, owing to a writedown of €1.2bn in the value of its mapping software business called Here.

Nokia said that net sales increased to about €3.3bn, the first annual rise since the first quarter of 2011, compared with €2.9bn in the previous quarter and the same period in the previous year, as it won new contracts to roll out networks in North America, Europe and Asia.
The majority of the increase came from the telecoms equipment and services business that now accounts for almost 90 per cent of sales, with smaller contributions from Here and a technology unit that oversees essential smartphone patents that rivals pay to use.
Rajeev Suri, Nokia chief executive, said: “Nokia’s third-quarter results demonstrate our strong position in a world where technology is undergoing significant change. We saw growth in all three of our businesses.”
The closely watched gross margin at Nokia rose to 44.5 per cent from 44 per cent last quarter, slower than in the previous quarter. The adjusted operating margin at the network business rose to 13.5 per cent from 8.4 per cent a year earlier.
Analysts at Natixis have highlighted a “group dilemma” in balancing sales growth against margins, which has raised doubts about the future level of operating margin.
However, Nokia now expects its operating margin – using a non-IFRS measure – for the full year 2014 to be slightly above 11 per cent, confirming it will be higher than guidance given at the start of the year. It expects net sales to increase on a year-on-year basis in the second half 2014.
Mr Suri said that the networks business benefited from a business mix weighted towards lucrative mobile broadband sales and regional mix that included strong gains in North America.
The group has forged a strong relationship with Sprint in the US, which is spending more on networks in the short term than rivals such as AT&T and Verizon as it seeks to close the gap on mobile coverage and performance.
Nokia is batting for market share with European companies such as Ericsson and Alcatel-Lucent as well as Huawei and ZTE from China. However, the Finnish group has recently won a number of other contracts in this highly-competitive market, including a $970m deal with China Mobile to provide 4G networks. 
Shares in Nokia have increased by more than a third in the past year since the decision to sell its handset operations to Microsoft. The US group has since been forced to cut jobs at the division as it seeks to stem a loss of market share of a once dominant business that proved too much for the Finnish company.
Shares in Nokia were 5 per cent higher on Thursday on the back of the results, which exceeded analyst expectations, valuing the group at about €25bn. Nokia’s market capitalisation sank to a low of less than €6bn in 2012 amid mounting problems in its handset business.
Nokia said that it needed to writedown about €1.2bn from Here to reflect the group’s valuation in a market where online maps are being provided by a number of group, including Apple and Google. Here had been included in the original talks with Microsoft before being pulled out of the sale.
Nokia took a radical decision last year to sell its mobile business, which was losing money rapidly as it lost sales to US groups such as Apple and Asian rivals such as Samsung and Huawei.
Mr Suri has said in the past that the long period of declining sales should end in the second half of the year. The group has previously focused on boosting its profitability through cost cutting at the division, with analysts remaining cautious about sales growth given the competition in the market. Sales fell in the first half of the year as the company sold or closed unprofitable and low-margin services contracts.
Net cash dropped sharply to €5bn, from the €6.5bn in the previous quarter when about €5bn was received from the proceeds of the sale of the devices business, as Nokia paid dividends and started share repurchasing.

Apple Pay: revolution at the tills as the digital wallet pays up

It’s rare to have a moment of technological revelation in McDonald’s. But it was there among the Big Macs that I realised how Apple Pay, the iPhone’s new digital wallet, could really change things.
It wasn’t actually my first try at using the mobile payments service, which launched with a software update for the iPhone 6 and 6 Plus on Monday. To be on the safe side, I had decided to start with the Apple Store itself. Buying a case for my thin new smartphone (lest it bend in my pocket), I asked a blue-shirted “Apple Genius” if I could use Apple Pay to settle up. I held my phone to his handheld credit card machine (which is itself an iPhone) and put my thumb on the Touch ID fingerprint reader. It pinged, and I’d paid. We looked at each other in amazement at how easy it was.

Checking out checkouts 
Using an Apple product in an Apple Store is cheating a bit, so I crossed the road to Walgreens, the ubiquitous pharmacy and general store. As I arrived at the counter with my groceries, I asked if I could use Apple Pay. “I don’t know if we support that,” said the chap behind the till. “We have Google Wallet.”

This surprised me, twofold. First, because Apple had mentioned Walgreens as being among the first two dozen US retailers to adopt its payments service. Second, because in two years of intermittently trying to pay using Google Wallet – a tap-to-pay feature, similar to Apple Pay, that is bundled with many Android smartphones – no cashier has ever suggested using it. Most looked at me blankly when I mentioned it so I gave up.
But it turned out that Apple Pay does work in Walgreens, thanks in part to the terminals that had been installed to support Google Wallet. It does not always pay to be first in the technology industry.
After just three days of testing, I feel confident that Apple Pay can succeed where other mobile wallets have failed. Thanks to its own stores and its clout with other retailers, Apple can educate consumers about a new technology better than any other company.

A McRevelation
So when I put aside my food snobbery, step into a local branch of McDonald’s in San Francisco’s South of Market district and buy a Hot ’n Spicy McChicken sandwich with just a tap of my iPhone, it no longer feels like a novelty. The McJobber doesn’t even get excited, since I’m not the first to use it (this is start-up central, after all). That’s the revelation: very soon, paying with a smartphone could be as normal as French fries. “I just want to get rid of my wallet,” says another iPhone 6 owner in the queue, although he has not worked out what to do with his driver’s licence. “I’ll probably try Google Wallet now,” says his friend.

Take a photo of your card 
Setting up Apple Pay is almost as straightforward as using it. Open the iPhone’s Passbook app, take a photo of the credit or debit card to add the long number automatically, then type in the other details.

More than 500 banks are expected to support the app but the service is only available to users with US accounts so far. A European launch is expected next year, where plastic cards using the same contactless payment technology (NFC, in the lingo) are already widely in use, so there should be plenty of readers at the checkouts.
The US is behind Europe in checkout technology: chip and pin cards are still rare.
So for now, despite the usual risk attached to any early technology adoption, Apple Pay feels more secure than swiping a regular credit card. After scanning a card, Apple says, it does not store the number itself, but creates an account number kept on a “secure element” in the iPhone. The fewer places that a credit card number ends up, the fewer opportunities there are for hackers to steal it.
Security is an important point because there is one remaining detail to mention: when I tried to use Apple Pay at a Subway, one of the food outlets Apple lists as participating, the checkout had not yet installed the right NFC reader. I swiped my card instead. It took less than 10 seconds, no slower than using my iPhone.
The verdict
Apple Pay feels like a big step forward for mobile payments, but perhaps there is a reason that plastic cards have stubbornly resisted technological disruption for so long. They just work.

Planet of the apps
What it is: Uber’s “Ride Now” feature, free, in its app for iPhone 6 and 6 Plus
Why you should try it: As the world’s most popular (and controversial) car-hailing app, Uber needs no introduction. But an update makes impressive use of Apple Pay’s in-app payment capabilities by reducing sign-up for new customers to a single finger press on the Touch ID reader. Entering your name, address and credit card details on a smartphone is laborious, which is why OpenTable, Instacart, Groupon and others are integrating Apple Pay. But Uber’s implementation is the best. “The beauty of Apple Pay is that it simplifies Uber’s sign-up process to a single tap,” it said in a blogpost. “No forms, no fuss.”