Winners and losers among Singapore companies in current oil surge
The Business Times
by TAY PEK GEK
BRENT crude oil prices are up more than 30 per cent this year and holding - but it won't be a case of a rising tide lifting all boats.
While the rally stirs hope for investors tracking the oil and gas sector, high oil prices are a concern for consuming companies in the aviation and transport sector.
OCBC Investment Research senior investment analyst Low Pei Han believes winners in a high oil price environment would include Keppel Corporation, Sembcorp Marine and by extension Sembcorp Industries.
She said: "Companies in the O&G industry should benefit..., though oil price is not the only determining factor in the near term."
What counts is which part of the value chain the company operates in, as individual demand and supply dynamics within the sub-sector may have a greater impact over the near to medium term.
According to SGX Research, the share prices of five O&G plays in 3Q18 have rebounded substantially from their 12-month troughs - averaging a 69.3 per cent increase from their respective 52-week lows - tracking crude gains. Crude has risen about 17 per cent since mid-August, and hit a four-year high at US$86 a barrel last week.
These five players are Rex International, KrisEnergy, Falcon Energy, AusGroup and China Aviation Oil (CAO).
For example, Rex International saw its shares spike to a 52-week high at 11.7 Singapore cents on Oct 5 from its trough of 4 Singapore cents less than two months ago.
Both Rex International and KrisEnergy are oil and gas exploration and production companies while Falcon Energy provides services to worldwide clients in exploration to post-production.
AusGroup provides asset maintenance, construction, access, fabrication and marine services to the energy, mining, and industrial sectors in Asia Pacific. CAO engages in trading jet fuel and other petroleum products to airline companies worldwide.
CGS-CIMB's head of equity research Lim Siew Khee told The Business Times that rig builders would rightfully benefit from higher oil prices and see orders coming in. But it may be a while before higher crude prices translate to new rig orders.
Ms Low said: "A supply glut and competition have stalled the momentum in orders. Sustained high oil prices rather than spikes in oil prices are more relevant to orders. "
On the global oil stage, the imminent US sanctions on Iran and political and social strife in Venezuela have led to lower oil production. While big producing nations say supply is ample, hedge funds and speculators are increasingly sceptical of that argument, betting that oil prices could rally further as the embargo on Iranian exports comes into force in November.
However, industry observers here are more measured about the commodity's price.
DBS Equity Research's Suvro Sarkar expects a pullback in oil prices caused by greater output from the US, Russia and Saudi Arabia, and he recommends buying key O&G proxies in the region on pullback.
O&G stocks have had a good run alongside oil price, with key proxies like Sembcorp Marine rising about 30 per cent since mid-August, he noted.
But Mr Sarkar prefers Sembcorp Industries as its current valuation remains undemanding, and he sees a target price of S$3.90, a hefty 30 per cent above its last traded price of S$2.96.
In contrast, firms whose earnings may be pressured by higher oil prices include those in the transport sector such as Singapore Airlines (SIA) and ComfortDelGro, OCBC Investment Research's Ms Low said.
However, amid sustained higher oil prices, these companies have the option of passing on some of the higher costs to consumers, and/or hedge some of their requirements to soften the blow, she added.
DBS analyst Paul Yong shares this view: "The sharp increase in oil price is negative for airlines generally, as jet fuel costs account for 25 to 45 per cent of operating costs; more so for low-cost carriers, though the impact on individual airlines would depend on how much and how well they have hedged their exposures.
"In our coverage, SIA is the best hedged with up to 46 per cent of its fuel requirements for the next four years hedged at a relatively low jet fuel price of US$65 to US$70 per barrel. "
Corrine Png, founder of transport equities research firm Crucial Perspective, was recently reported as saying that though SIA has the best fuel hedging strategy among all the Asian airlines, its substantial fuel hedging gains cannot completely offset the negative fuel cost impact.
DBS' Mr Yong also said that the Chinese carriers do not hedge any of their fuel requirements, but they do have significant pricing power on their domestic routes to offset some of the higher fuel costs.
"Garuda Indonesia would be the most affected carrier among names we cover as they have a relatively low fuel hedging position, less than 30 per cent at a relative high cost - more than US$70 a barrel for brent, and they are also impacted by a weak rupiah versus the US$," Mr Yong noted.
There is less consensus on transport giant ComfortDelGro.
Colin Tan, analyst at CGS-CIMB, pointed out that ComfortDelGro would likely be impacted by higher fuel cost but this "can be mitigated by the use of hedging instruments" as it has done in the past.
In its FY17 annual report, ComfortDelGro stated that it is "exposed to fluctuations in fuel price in its bus and rail operations and diesel sales business".
And it "seeks to hedge the price risk associated with its fuel needs after considering fuel indexation in its contracts with various local authorities and uses hedging instruments, where necessary, to achieve the desired hedge outcome".
However, it added that at the end of FY17, the company did not have outstanding fuel hedges.
Phillip Securities investment analyst Richard Leow thinks that the impact of rising oil prices on ComfortDelGro is limited.
He explained that fuel & electricity is just the third-largest cost component for both SBS Transit and ComfortDelGro, amounting to 13 per cent and 9 per cent of their operating expenses respectively.
The largest cost component for both is labour cost, followed by repairs & maintenance.
Mr Leow added that for the bus contracting model, "there is fuel price indexation, so SBS Transit is insulated from fluctuation in fuel price though there is a time lag in the indexation," he said.
"In short, there is almost no impact from rising diesel price for the bus business segment. Only the rail business has exposure to electricity price."
And he highlighted that diesel for taxis is not an expense item for ComfortDelGro. Instead, taxi hirers are the ones who bear the cost of diesel, though ComfortDelGro sells it at a subsidised rate to them.
In addition, ComfortDelGro's taxi fleet has been contracting, Mr Leow said.