Shares in Glencore (LSE: GLEN) have slumped by around 5% after it announced a fall in adjusted operating profit for 2015 of 68%. This was clearly due to the negative impact of commodity prices, which contributed to net exceptional charges of $5.8bn for the 2015 financial year. However, the fall in profit would have been worse were it not for cost efficiencies and favourable producer-country currencies.
On the cost front, Glencore is seeking to deliver a further $400m of savings during 2016 and is in the process of reducing capital expenditure. In 2015, industrial capital expenditure was cut by 30% to $5.7bn and Glencore has now cut its target for 2016 capital expenditure by an additional $300m so that it will be around $3.5bn. Given the outlook for the commodities sector and Glencore’s high degree of leverage, this appears to be a sensible step to take and should improve free cash flow.
In addition, Glencore is seeking to improve its balance sheet strength and reported asset sales of $1.6bn. It’s confident of achieving as much as $5bn of asset disposals during the remainder of 2016 and with net debt levels being reduced to $25.9bn, it appears to be making progress with its restructuring. In fact, net debt is due to fall to $15bn by the end of 2017 and this could have a positive impact on investor sentiment since the market has been highly concerned about Glencore’s degree of leverage.
Clearly, today’s results are a major disappointment for investors in Glencore. However, they’re not unexpected since commodity price falls have been savage. The key for the company’s share price is how it reacts to the challenges it faces. And with debt levels falling, the company’s restructuring being on track and investor sentiment towards commodity stocks having the potential to improve, Glencore could be a sound, albeit risky, long-term buy.
Shares with potential
Also releasing news today was Solo Oil (LSE: SOLO), with its 6.5% stake in the Horse Hill discovery near Gatwick continuing to drive its share price higher. In fact, its shares have been up by as much as 17% today after announcing that water-free 40-degree API, light, sweet oil has flowed naturally to the surface at a stabilised rate of 900 barrels per day.
According to Solo Oil, the news provides a clear and unequivocal demonstration of the potential of the Kimmeridge limestone play, with the results obtained to-date indicating that commercial production could lie ahead over the medium term. As such, investor sentiment in Solo Oil could continue to improve following its share price rise of 28% since the turn of the year.
Clearly, Solo Oil is highly dependent on news flow at the present time. While there’s the prospect for further upbeat updates from the Horse Hill development, the reality is that disappointments are almost inevitable and could hurt investor sentiment in the short run. As such, it seems likely that Solo Oil’s share price will remain volatile, although since it has interests in multiple assets across the globe, it could be worth a closer look for less risk-averse investors.