Tag Archives: crude oil

Technology destroyed some traditional businesses (3): Keppel Corp & Sembcorp Marine

The share price of Keppel Corp ended today at $6.42. It has lost about 35%-40% its steady state value of about $10 per share 3-4 years ago.  Everyone knows that the reason for this was due to the collapse of the oil price from more than $100 at around mid-2014 to less than $30 per barrel by January 2016. In fact, traditionally, Keppel share price is closely tied to the price of crude oil. Its arch rival, Sembcorp Marine, another public-listed company on the Singapore Stock Exchange (SGX) also exhibited the same behaviour. When the oil price hit close to $150 per barrel just before the global financial crisis, Keppel share price and Sembcorp Marine went above $14 and $6 respectively. When the oil price crashed during the global financial crisis, the share price of Keppel Corp and Sembcorp Maine went south hitting below $4 and $1.50 respectively. When the oil price went up again to US$90-$100 per barrel between mid-2012 to mid-2014, their share price again swung up. This time, Keppel Corp share price held steadier at around $10, while Sembcorp Marine share price exhibited more volatility as it has other marine related segments that were also going through a very trying period. But when the oil price crashed once again from more than $100 in mid-2014 to less than $30 in January 2016, we again witnessed the crash in the share price of Keppel Corp from above $10 to less than $5 and that of Sembcorp Marine from more than $4 to less than $1.50 per share. At the moment, the oil price is about $45 per barrel and share price of Keppel Corp and Sembcorp Marine have since advanced respectively to above $6 and $1.60 per share. To sum up it up, the stock prices of these two companies bear very close co-relation with the crude oil price even to this very day.

Unfortunately, for Keppel Corp, Sembcorp Marine together with about 20 or so offshore marine related companies, they have no control over the oil price. In other words, these companies are price takers. Their businesses are tied to the price of oil, but they have no influence over it. Then, of course, this begs the next question – when can we expect the oil price to go back to its glory days of more than $100 per barrel? Frankly, I do not know as I do not have a crystal ball to tell the future. It also means that many others out there do not know the answer as well. As I had mentioned in my recent talk organized by InvestingNote recently, in order to be a big winner in stocks we need to be ahead of the others on the winning side of the curve.  This means that we have to look beyond the present situation and make a calculated guess of the future using the present data.  We may be right, we may be wrong but a calculated guess substantiated with some critical metrics and data would help us reduce the risk of being at the wrong side of the curve than not to do any homework at all.

 

As we know, oil prices, just like prices of any other commodities, depends on its demand and supply.  On the demand side, it takes a huge global demand to push up the price of oil. It can be a long-drawn war or a huge industrialization leap. All these did not take place in the last ten years. Huge oil hoarding can complicate the demand scenario as well, but ultimately there is still a need for real demand in order to push up oil prices over a longer period. Even with the Chinese economy normalizing after the global financial crisis, the oil price did not seem to show any significant change. Right now, we have gone past the industrial age in the last century and entered into the information age. So, it also means that advancement in economies is not driven so much by oil demand.  That said, it does not mean that the total global demand for oil has dropped compared to that of 20-30 years ago. On the contrary, I think global demand could have increased during all these years as more economies with huge population size opened up. What created a ceiling in the oil price lies more likely on the supply side. Over the past 30 years or so, a lot of progress has been made in harnessing alternative energies. That takes a chunk off the demand for fossil fuel.  And unlike 20-30 years ago, when crude oil is extracted either via oil wells onshore or via oil rigs offshore, a new extraction technique has begun to muscle its way into the oil extraction scene. Shale oil extraction, which we have not heard about 20 years ago, is slowly elbowing out the more expensive offshore extraction using oil rigs. In fact, the technological advancement in shale oil extraction has made it gradually cheaper. Just 10 years ago, the break even cost was between $65 and $70 per barrel, and, by now, if the oil price reaches $60 per barrel or even lower, it would have made shale oil a flourishing trade. Franking speaking, oil shale technology is not really a modern technique. The exploration was as early as in the 1980s, but the environmental issues and the low oil price during the 1990s made it temporarily shelved. It was then re-harnessed when the oil price started to climb more than 10 years ago. In fact, this oil extraction technique has made US, the world largest crude oil user, to reverse from a net oil importer to a net oil exporter. This could also be the explanation for the glut situation recently. As such, super oil tankers have to be used to store the crude oil and park offshore in hope of better oil price in the future.

 

Perhaps, the share prices of Keppel Corp and Sembcorp Marine as well as the peripheral companies may have met their lows recently, it cannot be said that their share price would drastically go up anytime soon. Unless the demand or supply situation changes so drastically beyond our imagination in the foreseeable future, it is difficult to envisage a huge demand for oil rigs. Their share prices may continue oscillate according to the oil price, but big leaps in their share price still depend on the how convincing is the demand is for oil rigs. As a matter of opinion, it may not happen in the next few months or even the next 1-2 years down the road. Hopefully, I am wrong coming from an investor’s point or view, but right from a consumer’s point of view.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.