Sunday, 30 November 2014

Offshore and Marine Sector ---The leaking oil...

Perhaps the most remarkable market movement in 2014 happened in the commodity market: the fast and significant drop of crude oil prices. The benchmark oil prices went down over 30% since Aug, and they seem to go down further. Last Thursday, after OPEC announced that it would take no reduction in existing production quota, the wretched oil price plunged even further. 

So far a few reasons have been ventured to account for the dramatic change. 
1. Fundamental. Supply and demand. Demand slows due to economic slowdown in China and Europe. Supply increased substantially by US esp, the shale oil.
2. Conspiracy. US and Saudi Arab conspired to manipulate the oil price to hurt Russia, which relies on oil exporting money to finance its wars in Ukraine. 
3. Conspiracy. OPEC esp. the Middle East oil exporting countries(such as Saudi Arab) aim to exploit the low oil price to hurt shale oil production in US, to protect or increase their market share. Kill the nascent shale oil industry as the cost for shale oil extraction in US is much higher than traditional oil extraction in Middle East. 

More and more analysis and reports coming out every day with new market development, as fun as watching a spy movie. I guess no single factor can be totally responsible. Crude oil is an important natural resource which drives modern world and economic development. The fast drop of oil price surely have profound impact. The impact is definitely different to different countries, industry sectors, and individuals.  Let's just take a quick look at the impact to Singapore stock market. 

As you may know, our Singapore, despite its tiny physical size, has an large oil sector, mostly the oil refinement in Jurong Island and oil trading. These sectors are dominated by major world oil players, such as Shell, Exxon Mobil, etc. Since they are not listed in Singapore Stock Exchange, they have little direct impact to Singapore stock market. 

The domestic oil consuming companies, especially the troubled transportation sectors (bus, shipping, airlines,etc) will get a relief. But to the companies that have been benefiting from oil booming in last decade, it is really bad news.

Pictures says thousand words.

Big losers: SME offshore and marine sectors:
Marco Polo saw steady and firm momentum down trend.This stock looks hopeless right now.
Ezion saw elevated volatility and possibly another wave of diving.

Blue chips are not spared: 
Note all counters' elevated trading volume associated with the price drop, especially last trading day, indicating possibly large investors are dumping after OPEC's announcement. SembCorp Ind is a little better than SembMarine. Reason is obvious.
Technical indicators lost effectiveness, in the face of such tremendous momentum.

SIA to fly again? 
No comments. 
Only remember the joke: What is the fastest way for one to become a millionaire?  " Firstly, you become a billionaire, then buy and hold airline stocks."

All the wretched offshore and marine sectors are beaten down by the falling commodity market and falling faith in oil industry's prospects. It is a game change. It is markets' beta not company's alpha that matters. The debacle has little to do with individual companies.

I do not know if the oil industry will embrace slow growth in the years to come. But we do know that commodity has its cycles. The boom cycle for oil can not last for ever. It is reasonable to imagine a period where oil industry returns to slow growth and lackluster profit margin. 

Hence, the historical data are no longer good indicators, P/E, P/B, etc.

The commodity has its own price movement cycle. Usually things will get worse before they get better. Although one can not rule out the possibilities that oil price can rebound fast back to previous high levels, one can not make rational decisions based on that assumption. 

Besides, offshore sectors are vulnerable because middle east countries are more cost competitive and can sustain lower oil price for a long period. Look at this chart.

I feel lucky that I have no exposure to any of the companies related to oil. I will keep an eye on the market and hold fire tight until the wretched blue chip counters ( such as Keppel, SembCorp) drop to the over-over-over-stretched low price level. At the current price level, I will not buy at all. Although my gut feel is that they can drop further, I will not short them either, as the commodity price is so unpredictable. 

Although companies such as Keppel or SembCorp pay good and consistent dividend, it is not appropriate to think of them as the same dividend player as, say SPH or Reits. The former's income ( the part of income generated from offshore and marine sectors) are more project driven than recurring. Put this way, in 5 years, in 10 years, in 50 years, iPad, or Google may have already gone into the museum. The Staits Times will probably stay as they have been since 19th century. Oil may still be produced and used, but no longer as dominating or influential as they are in today. The offshore and marine companies may have been long dead or already transformed into some other business totally different from today. They may succeed or fail. We never know.

Fellow dividend income investors. Please be careful and check your portfolio whether there is leaking oil....

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