Saturday, 13 December 2014

Oil Price Slump – My Portfolio, What Approach & What Lessons Learnt

This post continues from previous post...

Despite exceptional last quarterly results, most of my O&G stock prices took a nose-dived, inherited from the 40% plummeted oil price, since Mid-Oct. Vallianz, Nam Cheong and Swissco all suffered. I accumulated SembCorp Ind (4.7) and Ezion (1.5) after the initial oil plunge. I also own KrisEnergy, but quite merely 2 lots in my SRS account, which I will probably ignored in this article.

The causes of oil price slump was detailed in my previous article - Read here. One of the reasons could be Saudi's effort to punish USA shale gas producers as well as Iranian and Russian oil companies. For this group of producers, oil price below $80 bbl is not feasible. With sustained low oil price, many high cost companies within this group are expected to be eliminated. If this is true, then it may well be temporary measure for OPEC. It does not make long term economic sense for OPEC to continue the oversupply to hurt their own pockets? But the question is how long will this oversupply of oil last? The panic had prompted sell call for almost all stocks with O&G exposures.

O&G sector is highly cyclical, just like shipping or construction sectors. For a high risk-averse investor, it is recommended to keep exposure low, or even downright avoid it. For those who still want to surf the tides and dabble with O&G stocks, I will discuss my approaches in the following.  


Gain in-depth knowledge about the industry

I invest in O&G stocks because I am working in this sector. The additional knowledge/info should help, hopefully I feel. We must realise O&G industry is also sub-divided into E&P Oil companies, Rig owners, FPSO owners, EPC contractors, OSV, Yards, Equipment suppliers etc. Read my earlier blog here to understand. The understanding of the industry, then the company is quite critical since O&G companies' revenue recognising methods is more abstract compared to most companies in other sector. Hence, do not over rely on analysts and stock bloggers, me included, :), and just follow blindly.

For e.g. Builders may boast huge order books, but orders such as Rigs may take as long as 30-36 months to deliver. For a vessel, it can be up to 18-24 months or more. Revenue recognition is partial during different stage of construction. If there are cancellations, profits recognised earlier may have to reversed. There is also difference between shallow water and deep-water exploration where the former require lower cost to breakeven, but more competitive. Knowing well the clients of the companies you invested is important too. It can determine if companies were paid on time or ever being paid. Do not over generalise the fate of a company just by looking at the balance sheet, without knowing what exactly the business model is all about and the strength of the management team spearheading the company. Specifically for O&G sectors, good balance sheet does not equate to stable growth. For vessel owners, financing of the vessels is critical. Most local OSV owners are turning to China SOE yards for financing, which reduce their own capital risks. There are so much more to know….

If you are not familiar, please manage risk accordingly and diversify your portfolio, which I will discuss in the next section. 

Diversify your portfolio – It is ok to lose 4 and still win 6.

The oil price plunge lately was so sudden. As always, stock price climb stairs up but take elevator down. See below table comparing prices of my portfolio between 1 Oct and yesterday.

Price, 1 Oct
Price, 11 Dec
%
Vallianz
0.11
0.074
-48.6
Nam Cheong
0.44
0.305
-44.3
Swissco
1.02
0.53
-92.5
Sembcorp Ind
5.15
4.29
-20.0
Ezion
1.78
1.08
-64.8

The drastic share price drop is painful. Need Panadols! While painful, it is bearable for me because O&G stocks only accounts for 15-20% of my total portfolio (at cost). A 50% drop in prices for this group will then account for less than 10% decline of total portfolio. My current portfolio as follows.

Stock Category
% Cost of Portfolio
Dividend
40
Defensive
31
Cyclical
16
Others
13

Note it is my own definition for the categories. Dividend category are mostly Reits or stocks with >5% yield. Defensive are market cap >1b with exposure in staple food & beverage, transport, telco, healthcare, utilities etc. Cyclical includes O&G and Construction, although I had divested all my construction stocks earlier. Others, are usually smaller cap with growth potential.

Remember you do not need to win all the time. Winning 60% of the time is good enough. This is the importance of Diversification.   

During market optimism - Set entry and exit points. Do not be greedy, and know when to take profits

O&G stocks tidal price is dependent on oil price movements, which in turn subject to OPEC manipulation or any political situation, such as war. When you enter, know when to exit. Thus, setting entry and exit points are of grave importance. Basic rule that everyone knows but do not follow always, “Do not buy at the top of the price curve”. The additional knowledge in the industry should also be helpful in making this decision.

Do not be greedy! Knowing when to take profits periodically is utmost important. A 20-30% increase in price is well justified to take profits! Refer to my earlier blogs below, where I took profits for Vallianz, Nam Cheong and Swissco. "Sold Nam Cheong at 0.48 & Swissco 0.99 (split-adjusted) in July" & "Sold Vallianz at 0.15 in May"

Taking into consideration profits taken earlier, I am lucky that my O&G portfolio it is still net positive. It could have been worst!

During market pessimism - Sell early and Buy back later

Oil price first dropped significantly Mid Oct. Within less than a month, I nibbled (less than S$5k per stock) and bought Sembcorp and Ezion. I WAS VERY WRONG! A Wall Street saying “Never Catch a Falling Knife”. Being aware of general market pessimism, I should not have made any purchase so early.  Instead I could have WAITED FOR NEW BUY and SELL EARLY existing portfolio using technical indicators and possibly BUY BACK LATER at a much lower price, during the uptrend. Time is another factor why I did not sell fast enough, which I will discuss in the next section. 

Do not hold many cyclical stocks if you have no time to monitor

If you do not have time in monitor / focus on your cyclical stock portfolio, try to keep its percentage of your portfolio low. Coincidently in the last few months, I had been so busy finalising contracts and also traveling overseas so often for work either on the road or plane. My investment plans was distracted by my work and I did not have time to trade at the right time. The sudden fall in oil price caught me by surprise and my response to the plummeted price was too slow. WRONG AGAIN. I had only myself to blame!

Rolf’s Approach to his Portfolio

Always tell yourself “Never be too Happy and Arrogant when stock prices are up, and Never be too Sad when prices are down!” The same applies to life. Sometimes, it is more important to admit mistakes and learn from it.

Below my recent action / approach on my own portfolio.  

Nam Cheong - Divested
This week, I started clearing leave and have more time. I divested entirely 30 lots of Nam Cheong. Petronas Capex cutting and NOC retrenchments news do raised eyebrows. Nam Cheong Build-To-Stock business model is considered risky and more susceptible to business decline in the face of current oil price crisis. I do not reckon Nam Cheong business will collapse since they had been hit worst during GFC. Their lean, crisis-experienced management together with vessel financing from Fujian yards should also cushioned them from major catastrophe. But earnings may tank in 2016 resulting from potential lesser orders, if oil price continued to stay low. The lesson in 2008-09 must not be forgotten. I cut losses at ~10% drop to cost, but considering previous profits in July and dividends received, I still made a decent profit of S$7.5k out of it this year.

Vallianz & Swissco - Wait and See
For Vallianz and Swissco, current position this year is still overall net positive. I do not know if it will last? I owned a mere 3 lots of Ezion, hence it is not bothering me too much.

Vallianz vessels are mostly low-end vessels operating in shallow waters operating in Mexico, Saudi and SEA. I am less worried because existing vessels had firm chartered contracts. For vessels under construction (not so many yet), financing is provided by Chinese SOE shipyards. Yesterday Vallianz announced trading halt together with major shareholder Swiber. Not sure what stories will be cooked this time?

Ezion and Swissco liftboat businesses instead of seeing decline should benefit from the low oil price eventually. This is because while oil companies cut spending on E&P, they will want to enhance/maximise existing oil fields, which may well spur demand for more liftboats. But then again market sentiments are so bad now that even miracles may not overshadow the big picture. 

Another reason why investors are shunning from the counter is due to the high debts of these companies. While I am taking conservative approach, I am pretty confident that all three companies still have strong fundamentals to survive the storm.

Overall I am taking a wait and see approach and will keep track of prices closely. If necessary, I may sell and buy back later. We shall see.


Last of all, be reminded of the volatility of the market, forget what I said and use your own judgement! 

17 comments:

  1. Hi Rolf,

    I see that you are not holding or intending to buy Keppel Corp and Sembcorp Marine. Is there a reason why you are shunning large caps?

    Actually, Kris Energy piqued my interest because it does E&P in the SEA region. From one of those O&G reports by one of the buldge bracket banks, breakeven for E&P in SEA region is US$40-50 per barrel. I may add a few lots of KrisEnergy.

    Cheers,
    Naro

    ReplyDelete
  2. Hi Naro,

    I am waiting. If oil price falls further, these large caps will slip more. Then I pounce! If oil price rise instead, then at least my existing O&G will not suffer heavy beatings. Either way, I am covered, hopefully.

    KC is with property and O&G. Hence I worry double plunges magnify! Perhaps price need to be more attractive. Moreover 1 lot is >8k, need more cash. I prefer SCI than SMM, since worst case, utilities can cushion plummeted oil segment.

    I like KrisEnergy. A friend of mine just sold some equipment to them and we chatted yesterday. Their management team are ex pearl energy. They had successfully track records! Better still Keppel is a major sh. They are based in Thailand and shallow water E&P should be low cost, low tech and less susceptible to crisis.

    But E&P businesses are highly unpredictable, high risk high gain. it can also go the opposite direction if they are unlucky in exploration such that production of oil is not optimal. I have no guts to place increased bets!

    Rolf

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  3. Hi Rolf

    It is always easier to look back and wish if we would have done this or that, but that's precisely the hardest part in behavioral finance, trying to predict what has already been predicted.

    Don't be too hard on yourself. The fact that you are working in an O&G industry gives you a major advantage but I think it also makes you really hard since you know you can't undergo another failure unlike the other investors who has lesser knowledge about them.

    I think the best way to impose this is to focus on the strategy itself and stick through it regardless of the situation. If you are more comfortable with cut loss, then by all means do so as it will save you some nice cash down there where others are still losing. Some people prefer the holding strategy and it is up to their comfortable level as well. In any case, stay comfortable and know what we are doing, we should be fine. :)

    ReplyDelete
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    1. Hi B,

      To me, you are one of the most sensible bloggers around! I like you! Haha. Thanks for the good suggestion, already locked into my brain system! Our brain is just like a “business” sometimes, anything good, we should not resist and keep adding the “good stuffs” to it and grow continuously.

      Actually I am not being hard on myself at all. In fact I am proud that my stake in NamCheong average/overall generated decent 35- 40% returns, inclusive of the recent 10% cut loss trade. Rest of the counters, I am still confident. So it is fine. I probably had undergone more failures in life than this one to be hard for me to swallow. Haha …you know I am a very “suey” guy as my Name suggest, so everything for me to get has to be hardwork! The cut loss is a stark reminder to be pragmatic. Also any form of mistakes if you ADMIT it loudy (by writing/reminding, your brain ultimately will function to be more receptive not to repeat it! Better to see failures (big or small) as lessons, rather to take it hard.

      My strategy is depicted on Richard’s interview - Q4. Read here. For me, it’s mixture. I have shares for long term (hold strategy), and short term cyclical (take profit /cut loss when necessary)!

      Totally agree that we must be comfortable. For me, I am extremely happy now, that I am writing this comment in the hospital with my newborn again and my wife!

      Merry X’mas to you B. Wish you and family a splendid holiday seasons and an excellent 2015 ahead.

      Rolf

      Delete
  4. Hi Rolf

    That's a big event there!!!

    Congrats to your newly born child and to your wife as well. It's exciting time ahead in 2015, even though you miss out on the Jubilee year (just kidding). Wishing you too a good Dec month and a good year in 2015 :)

    ReplyDelete
    Replies
    1. Hi B,
      Thanks for the well wishes. Heard about the Jubilee year and its a waste that we miss on that. Wait.....Its still not too late if I have another one next year. Haha.

      Wish you a splendid 2015 ahead.
      A busy but happy 2015!

      Delete
  5. Hi Rolf

    Enjoy reading your blog. Great insights, balanced views and thoughtful comments.

    Sent an earlier message but failed to work. So keep this shorter.

    Any views on whether the fall in oil and declines in share prices of Oil and Gas firms in Singapore will prompt M&A and consolidations?

    With Falcon Energy looking to buy out CH Offshore, the move of Ezion for a share of Triyards and the pending announcement of Swiber/Vallianz which may or may not be some deal for Swiber to sell Vallianz to bigger player (so Swiber can shore up its B/S), things could be right time for M&A activity to boom in this space as bigger players may look to buy out the weaker ones to greater bigger market share and be stronger with less competition when sector hits upturn.

    Any comment on which aspects of the sector this may likely occur. I have feeling the OSV space could be a likely sector, and perhaps the ECP domain.

    Red

    ReplyDelete
    Replies
    1. Hi Red,

      Thanks for the compliments. Flattered!
      More M&A and consolidations are likely if share price continued to be battered.

      FEG deal with CHO makes sense! FEG marine business of OSV in general is similar to CHO. No point having 2 companies, but CHO founders may counter propose. In addition FEG new rig division also require more vessels once the JU is delivered. I know FEG is very strong in China with COSL, who required JU rigs.

      Ezion built in Triyards almost all her liftboats. Just like EMAS, they also decide to own stakes in Triyards. Make sense, since they can account Triyards profits into their books! But Triyards will probably hardly received 3rd party orders, since their 3rd party clients are likely competitors of Ezion & EMAS.

      Swiber/Vallianz trading halt revealed, not conso, but new contracts of $710m & $97m. Swiber is in huge debt. They need to continue receive orders to survive/roll forward. They just did that, though it is very stressful. Actually cost restructuring makes more sense for Swiber. By transferring their OSV assets into Vallianz, this can make Swiber more asset light and focus on high end projects in Offshore Construction, EPIC, Subsea or even LNG etc. Despite the oil price crisis, if you look very long term, Subsea and LNG are still the future prospects!

      Consolidation for Swiber is their last resort. Do not think it will do Vallianz good now, maybe later once their market cap becomes higher and when they possibly enter main board. Vallianz should continue to perform in their earnings due to their strong foothold in Saudi with Rawabi. The latest deal sounds like Saudi Aramco? Remember Saudi is producing more and more….but one thing to note is that all contracts now will be “Cheap”! Vallianz should be able to counter that, since their newbuild vessels are built in China SOE yards on first right of refusal basis and can lighten their cashflow.

      About which sectors M&A may happen I am not so sure. Not many listed OSV players left for more news of acquisition. Aside for all aforementioned companies, STX OSV already changed to Vard. Swiber sold Kruez. Mermaid acquired Jaya. Marco Polo collaborated with Nam Cheong. POSH just listed this year. Swissco related to Ezion. Ezion-Ausgroup-Charisma. Ezion close relationship with Ezra-Triyards-EMAS. Otto Marine, ASL unlikely? Miclyn mention about listing earlier after Macquarie sold their stake, but no news. Maybe KS Energy and Atlantic Navigation?

      By the way, what is ECP? Engineering Construction Project?

      Hope the above helps!

      Are you also in the O&M sectors?

      Rolf

      Delete
    2. Hi Rolf,

      Thanks for the very good post! Now I have better understanding about O&M.

      You mentioned Subsea and LNG are still the future prospects in long term. And I do feel the same, looking at the urbanisation, people demanding higher standard of living, and hence higher demands for energy. In your view, how companies like Keppel Corp and SembCorp are benefiting from Subsea and LNG future prospects?

      Thank you.

      Delete
    3. Hi Boon Chin,

      Thanks for the compliment. If you are interested, in my blog, there are more posts related to O&G / O&M. Hope that you can come by more often .

      Subsea means underwater and further categorize into shallow, deep waters & even ultra-deep waters exploration/drilling or construction of subsea modules or pipelines. Deeper water normally requires more advance technology. In the west, especially in Norway (North Sea), subsea deepwater is already quite commonplace. Recent years, Brazil discovered pre-salts fields in ultra-deep water, hence they require many deepwater subsea related vessels & eqpt. In Asia, waters are mostly shallow. Australia does have a fair bit of subsea deepwaters.

      Some front runners in SG such as Ezra (via EMAS AMC), Swiber (via Kruez previously), Mermaid Maritime, MTQ etc are already into subsea vessels/equipment business, but mostly shallow water with fewer in deepwater.

      Recently Keppel Singmarine (subsidiary of Keppel O&M), is also constructing a Subsea Construction Vessel for BP to be deployed in Baku Caspian sea.

      Overall, Asia’s expertise in Subsea deepwater is still lacking compared to Americas / Europe. That is the reason why you can see in EMAS, there are so many expats! EMAS AMC is deepwater subsea and essentially centered in Norway where it was previously under Aker group.
      For LNG you can refer to my earlier post: Why Singaporeans should know more about LNG?
      In one of the paragraphs, I did mention about Keppel and Semb Marine benefiting from LNG.
      Keppel also had a division called KOMtech researching on LNG.

      While I agree that both segments are the future, how many has the patience to wait for the future in investments?

      Rolf

      Delete
  6. hi i read your blog recently, really learn quite a lot about oil and gas from your blog.
    i do have some oil and gas shares, really hope they will soar in coming days.

    ReplyDelete
    Replies
    1. Hi Yeh,

      Tks for reading and commenting. Really appreciate it. Glad that it provides some useful info to u. :-)

      Hope your O&G shares will soar! But coming days to soar sounds quite a feat.

      More than welcome u to share... ur investing/ stock holding experiences n blog if u hav one?

      Hope my blog can continue to serve ur eyes n mind. Tks.

      Delete
    2. hi Rolf Suey
      i dont have any:)

      i have HL finance, OCBC, STE , Singtel, Dmx Tech, Marco polo, Stamford LD, semb ind, semb marine, Hyflux Preference share, capitalmall bond, PEC, oxley, Hock lian seng, F&N, UOI

      sitting in paper loss now:( . but some of my shares do pay me well dividend, so i just hold on.

      Delete
  7. Hi Yeh,

    Thanks for replying. As you already said, it is just paper losses. I am sure you will make solid gains soon.

    Dividends are always icing to the cake.

    As for O&G, a further dip in oil prices can be damaging to share price and we must be mentally prepare to absorb the temporary shock!

    Lastly, I see that you hold preference share. What is the benefit of preference shares actually?

    ReplyDelete
    Replies
    1. mainly for dividend. i applied it when its ipo few years ago.
      i think preference share dividend is much more consistent and steady than normal share.

      Delete
  8. Hi Rolf,

    I am holding Nam Cheong since early last year about 7% paper loss now, lucky their dividends will cover about 4% so not so bad. I also bought Keppel in December at 8.26. I would like to ask some questions:

    - Nam Cheong claims they are the top dog in the shallow water vessels industry and that they are recession-proof. I can't find any data on that. What's your opinion or do you have any sources to verify this?

    -Keppel fcf haven't been positive for 4-5 years and their debt is getting bigger. Is there some cashflow recognition kind of problem in the projects industry in general? ( I got lured in by low prices and insider buying so I bought without researching much!)

    ReplyDelete
    Replies
    1. Hi BfGf,

      Tks for e comments.

      Before the oil crisis, Kep and NamC were very promising stocks.

      But Recession proof is a big word? I will give a very self-opinionated view. Oil company plan investment and allocate project budgets /costs based on oil revenue at >$100. Now 40-50% price which means revenue down.

      If the companies at the top of value chain is affected, they will take cut cost regardless of which sectors within O&G u r in! So who ll be affected?... Ask for discounts? Projects on Hold? Stop all investments?

      If oil price rebound, things may take a turn, but will not be so fast.

      I will not give too much comments on NamC or KepC specifically, since I know them very well! Sounds contradicting? Maybe market is always irrational, so the more u noe as insider the more u r wrong!

      Shallow water produce oil more cheaply, since tech is simple. Hence they are less affected than deepwater. What u need to understand is if there ll be oversupply of vessels?

      For Kep O&M, they had not receive any Rig orders since oil crisis. They continue though to receive sophisticated vessels such as Pipelay, multi purpose vessels. FPSO which is production and repairs will be less affected, but still pricing will be competitive!

      In rig n shipbuilding, payment terms r not favorable, hence u require to finance the projects for the clients. Sometimes Kep also take a stake in the Rigs! Kep also have property sector, which is also investment intensive. These reasons probably explains the poor FCF!

      For ur questions on shallow water and more other questions, u may want to find more info from the blog left column under "Sector - Oil and Gas" and "Companies - NamC and Kepcorp!

      Delete