Are There Any Opportunities With Oil’s Recent Plunge?

 

Over the past six months, I am sure that many of us have seen or read something on the news along the lines of “Plunging oil prices!” or “How low can oil prices get?”

But I think what we all want to know would be are there any opportunities to be made from this event? Before looking at some of the affected SGX-listed oil and gas companies, we will first look at the plunge in oil prices.

 

How much has Crude Oil prices changed in 2014?

There are a few benchmarks for crude oil, the three primary one are WTI (West Texas Intermediate), Brent Blend and Dubai Crude. The spread or difference between these three is normally explained by the difference in transportation cost.

But for today, let’s focus on WTI as they are reportedly the world’s most actively traded energy product, making them the internationally recognized benchmark for crude oil. An interesting fact is that WTI is described as light, sweet crude because, wait for it, it really tastes sweet!

So how much has WTI plummeted in 2014? Well, by THIS much:

 

In just a short span of six months (Jul-Dec 2014), WTI fell 50% from over US$100 per barrel to just US$52.69 per barrel. Ouch! This was the lowest since the Global Financial Crisis back in 2008.

 

So What Are Some Reasons Behind Crude Oil’s Drop?

We have to confess that we aren’t experts on this issue and the following reasons are just some rationales that we have seen reported on the internet. The following was solely for information and we do not have any opinion on the direction of oil prices. Some reasons reported included:

1)    Just simple supply and demand

2)    Increase in supply from US Shale

3)    Saudi Arabia protecting market share

4)    Low cost producers trying to chase out competition

5)    Combating the Islamic State

6)    And even conspiracy theories related to Russia!

 

Now We Come Back To The Interesting Part of Affected SGX-Listed Offshore and Marine Players

We would start with the powerhouses of:

 

Keppel Corporation Ltd (SGX:BN4), the world’s leader of jack-up rigs and Sembcorp Marine Ltd (SGX:S51) the next time line were at levels not seen since 2011. Our readers should also be familiar with these two names as they were within STI’s bottom three performers in our article “Who Made STI’s Bottom 3 In 2014”. In terms of share price, Keppel and Sembcorp Marine fell 23% and 28% respectively! To put things in perspective, a 23% drop in market capitalization was close to S$5 billion! Woah.

 

 

Rig builders were not the only ones affected. Singapore was home to a number of offshore support operators like Ezion Holdings Ltd (EZI:SP), PACC Offshore Support Holdings Ltd (SGX:U6C), Pacific Radiance Ltd (SGX:T8V) and Mermaid Maritime PLC (SGX:DU4). One of the most badly hit ones was PACC, which had fallen close to 50% since its IPO less than a year ago!

 

Value In Action

Opportunity naturally comes with dips in prices. However, given that each person has a different perception of risk, there isn’t a universal price target. Some would find a 20% price drop is interesting while for others maybe only when prices fall 90%, it would then be interesting. What we can say is that, at the end of the day, after looking deep into each company for strong financials, we only invest when we are comfortable enough with them to be able to sleep soundly at night!

 

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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.

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