The month of November 2018 turned out to be an exasperating month for several locally-listed oil and gas (O&G) players with the benchmark FTSE ST Oil & Gas Index down by close to 3 percent for the month, and 21.4 percent year-to-date. With the major crude oil prices like the West Texas Intermediate (WTI) and Brent Crude falling close to new lows of US$50.93 and US$58.71 per barrel as of 30 November 2018 respectively, how might it impact the local O&G producers’ stock prices and fundamentals?
In the next section, we shall examine the overall market fundamentals, and how the upcoming Organisation For Petroleum Exporting Nations (OPEC) meetings in Vienna on 06 and 07 December might impact crude oil prices, and we will also briefly looked at the stock prices of major O&G players like Keppel Corporation Ltd, and Sembcorp Marine.
Falling Crude Oil Prices
Source: Stockcharts.com (30 November 2018)
Brent Crude Oil prices has fallen by almost 32 percent after peaking at around US$86 per barrel in October 2018. The fall in oil prices coincided with major geopolitical events surrounding gulf nations including the alleged murder of Saudi Arabian journalist Jamal Khashoggi at the Saudi’s embassy in Istanbul, Turkey in early October, and the reinstatement of economic and oil sanctions against Iran on 05 November.
While many investors might have thought that these geopolitical events presented more upside than downside risks, the US crude oil production is soaring and is now producing 129,000 more barrels per day (bpd) in September to a fresh record of 11.5 million bpd. The onrush in crude oil supply could be impacts of producers stockpiling oil in anticipation of a harsh winter, and the expected demand from the two major US holidays in November including Veterans Day and Thanksgiving Day.
However, the larger focus is now turned towards the upcoming OPEC meeting on 6 and 7 December where initial news report, coming out from Bloomberg, suggested that there could be a potential deal that could see OPEC nations cutting production by 1.3 million bpd. Market rumours lifted oil prices somewhat during the final day of trading in November as Brent Crude prices rose from the session low of US$58.25.
Similar to Brent crude, the US West Texas Intermediate (WTI) (see chart below) has also fallen by close to 33 percent from the October peak of around US$76 per barrel to close November’s session at US$50.93 per barrel.
Source: Stockcharts.com (30 November 2018)
Amidst crude oil prices falling from the year’s highs, many reports arose that reflected conflicting views about the demand-supply dynamics in the oil market. For one, a monthly Reuters survey noted that production output targets in November by 12 OPEC members fell by 110,000 bpd from October, but total OPEC output has fallen only by 160,000 bpd.
In contrast, another indicator known as the Chicago Mercantile Exchange (CME) OpecWatch released on 30 November, there seemed to suggest that expectations of a production cut were weakening. This indicator uses the WTI crude oil options markets to gauge the probabilities of certain outcomes of OPEC meetings, and it shifted from 70 percent expectation of a small production cut earlier in the week to about 56 percent on 30 November.
With the current crude oil prices plunging, it appeared the oil price downsides might extend past OPEC meetings in Decenber. Investors are questioning whether this year could present new lows for entry purposes, and what the counters to take note pre-and-post-OPEC meeting.
FTSE ST Oil & Gas Index is at its major troughs
Source: Phillip Securities Pte Ltd (30 November 2018)
The benchmark FTSE ST Oil & Gas Index (FSTOG.SG) has also seen a cascading decline from the year’s high of 473.99 to a low of 313. This is equivalent to a 34 percent decline and is somewhat similar to the percentage magnitude of decline of the physical oil supply prices shown earlier. Despite the index readings consolidating at 313, we think that further slides below the current low levels cannot be ruled out.
Vying For Investors’ Attention
The two major locally-listed corporations Keppel Corporation and Sembcorp Marine have also been reporting less than robust quarterly earnings. Despite the major oil price declines, we do not expect a drastic correction to the number O&G drilling deals negotiated earlier. Moreover, both have announced contract wins for several months, and further anticipate that it will be particularly difficult to achieve robust earnings this year given how crude oil prices have plummeted.
First To Recover
In the latest earnings announcement in October, Keppel’s Offshore and Marine (O&M) division turned in a $2 million net profit in 3Q18. Meanwhile, Keppel Corp’s O&M division has also secured contracts worth $1.4 billion since the beginning of the year. This was also more than the $1.2 billion contracts secured for the whole of 2017. At the end of 3Q18, the O&M net order book was $4.4 billion, excluding contracts from Sete Brasil which has been terminated due to the latter’s ongoing bankruptcy.
At the closing price of $6.06 on 30 November, Keppel Corp’s stock price trades at a high 32.9 times trailing 12-months price-to-earnings (P/E) multiple, with a 12-month dividend yield of four percent according to SGX Stockfacts. While cashflow from operations (CFO) stood at $730.5 million for last twelve months (LTM) ending 30 September 2018, revenue growth is still declining at 8.3 percent during the similar time period at $5.8 billion.
On the other end of the spectrum, Sembcorp Marine’s (SMM) latest earnings release showed 9M18 loss of $80 million, worse than the Street’s estimates net loss of $46 million. For 3Q18 ending September, SMM reported a year-over-year (YoY) rise in revenue to $1.2 billion and a net loss of $29.8 million. This compares to a net profit of $100.7 million in 3Q17.
At the market closing price of $1.60 on 30 November, the Company trades at a relatively high price-to-book (P/B) multiple of 1.4 times and a low dividend yield of 0.62 percent according to SGX Stockfacts. A positive part of the overall earnings report is the starting recovery of operating cash flows. For LTM ending 30 September 2018, cash flow from operations at $385 million.
Going In Or Staying Out?
While we are not in the position of providing any specific recommendations, the slow recovery in both Keppel Corp. and Sembcorp Marine’s operating cash flows appears to suggest potential road to recovery. However, better profitability in the near-term is still marred by declining oil prices.
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