Saturday, December 5, 2015

This Oil situation is different from 2008's

Since mid 2014, Oil prices has been on a decline from $115 to $42 now. There're only two real reasons:

1. Over supply
2. Weakening demand

Reason number 1 is really the bigger reason rather than reason 2.

Supply will likely remain high, worsening the glut
  • OPEC raises output limit despite record low oil prices, despite protests from struggling OPEC members (from 30 to 31.5m barrels/day, EXCLUDING Indonesia)
  • Russian Energy Minister say output cuts "isn't viable"
  • Russia's output is close to record level now
  • Iran will bring more supply once sanctions are lifted in 2016, and its output won't be below pre-sanction levels, worsening the supply glut
Oil in 2008 fell to $40 too
Well really, except this time it's different.

Back in 2008, when demand plummeted due to the financial crisis, Saudi Arabia brought OPEC to cut production in a bid to lift oil prices. (read: supply cut).

At the same time, the central banks have been cutting interest rates and boosting the economy (read: demand catalyst).

Also, China in 2008 was growing at a faster rate than now, in 2015. Their demand for oil is much higher than 2015. (read: demand was higher back then).

And so, you could really see oil prices recovering within a year as there were really positive catalysts and actions that helped its recovery.
Source: Bloomberg

Yet, now, nobody is really doing anything to bring oil prices back up.

OPEC wants to defend market share.
Russia doesn't want to cut output.
If OPEC and Russia does cut output, US Shale oil supply will increase again when oil prices recover, bringing to status quo.
And we have Iran joining the oil glut situation. Hurray!!

Dangerous to assume 
So, it is very dangerous to assume.

Assume that just because a stock is a blue chip, that it'll survive this oil crisis like how they survived 2008 (except the situation is vastly different).

Assume that just because its a blue chip, it's price will definitely recover. SMRT/Noble/NOL anyone?

We must therefore not simply assume. If we believe in a stock, believe so because we know that the management will be capable of driving the company out of this crisis.

Not just because it's a blue chip, or just because they've survived 2008.

Surviving 2008 doesn't mean will survive now 
It all boils down to fundamentals.

Just because the 3 local telco survived 2008, does it mean that they'll definitely survive any subsequent obstacle?
But, back in 2008, there wasn't a threat of a 4th telco. Things were different.

Just because Sembcorp Utilities survived 2008, does it mean they'll remain equally profitable now?
But back in 2008, vesting contracts levels set by EMA was much higher than in 2015. Things were different.

So please, let us always remind ourselves to think about the fundamentals, and not simply generalise the situation and mislead ourselves.

Tuesday, December 1, 2015

My view on SembMarine's Profit Guidance

As we know, Sembmarine issued a profit guidance for Q4 2015 stating that the quarter will likely see a net loss with the full year result affected accordingly.

I'm vested in SCI, naturally this becomes a concern for me. I did some quick research on SMM.

First ever net loss quarter for SMM
This would be a first ever net loss for SMM. A quick check on their quarterly showed that SMM has always registered a profit for each quarter.

I'm guessing a large part of this net loss is attributable to the reversal of profits pertaining to Marco Polo (either on a prudent basis or with consultation with their auditors on the accounting treatment).

SMM closed $2.06 and is heading for trouble
Looks like SMM will definitely open below $2 on Wednesday morning (3 December 2015) and possible heading to the $1.60-1.80 range. 

"I will buy it when it hits the price levels of 2008!"
I won't be so quick to say that (even if I'm interested in an all-marine counter). This time round, it's different.

I've mentioned previously that SMM actually registered healthy profits since being listed (including the 2008/09 period). We must always remember to look back at the fundamentals.

Oils prices were trading around $40 but quickly recovered to above $80 and later $100 as there was the Iraq war and Libyan uprising. 

Now, however, oil prices are depressed due to oversupply and low demand. Sanctions for Iran was lifted and more oil will be pouring in the market. Shale oil is producing more oil than it was during 2008. Demand is slowing due to the China. I could go on and on, but my point is, there situation is quite different now from 2008.

Just because 2008 was the lowest price for SMM doesn't mean it can't go lower.

My take on the whole Marco Polo saga
SMM has been in the rig building business for so long and it earns a good reputation. As with any engineering work, there'll always been "defects" and imperfections. It'll be inconceivable to think that SMM's work is so "bad" that it'll affect the main function of the rig. If you nit pick, you'll bound to find something. If Marco Polo is looking for a perfect rig, they might as well not.

Marco Polo is either too new to the rig industry to know that those "cracks" are the norm or they're simply finding an easy way to wiggle out of the contract after the oil market crashed. 

SMM didn't deny the allegations on the "cracks" probably because those cracks really exist but they are also deemed to be reasonable. It's anyone's guess really.

What about SCI?
SCI owns about 60% of SMM. For the 9 months ending September 2015, profits from Utilities stands about $300m with Marine taking about $150m.

For the full year, I'm expecting profits from Utilities to be about $400m and Marine about $100m (worse case). This would result in about 26 EPS and with $3 share price, that'll be about P/E of 11.5

Forward P/E?
I don't have the crystal ball. But just to be on the conservative side, let's assume the following profit: 
Utilities: $450m 10% growth (India in GROWING).
Marine: $50m halved profits

This would roughly give a comparable profit year on year. I'm bull on utilities as Singapore contributions have levelled out and overseas contribution is expected to be the main uplift.

That'll mean full year EPS for next year might be 26cents as well.

If given a chance, would I still buy SCI?
Quick answer is no. No, because I don't like the fact that there's no clear positive catalyst insight for the Marine industry. But now that I'm already vested, would I realise my loss? No. My gut tells me that SMM will ride out this storm. It just needs a little more time.