Wednesday, 21 October 2020

Which Listed Oil Companies Should You Buy?

Oil companies all over the world has their stock prices at all-time low. 

At the time of writing this article, Exxon (XOM)’s share price of USD 34 equals March low this year, while Shell (RDS)’s share price of USD 24 is a mere 10 percent above the pandemic low. 

These prices were lowest in two-decades. 

Chevron (CVX) is the better performer. Still, the price of USD 71 is at decade-low, if we disregard March’s trough. 

China Oil giants are not spared from the price onslaught. Share prices of PetroChina (857) HKD 2.2 and Sinopec (386) HKD 3.0 both dived below March low, hitting record low in the last 15 years. 

CNOOC (883) HKD 7.3 is not too far above March’s trough and is at decade low. 

Question: Are the share prices cheap now? Should you buy now? 

Please read the disclaimer link here, before this article have any influence on any decisions you make. 

NOBODY CAN PREDICT OIL PRICE! 

Most people will start to perform fundamental analysis going through all the metrics of the oil companies to derive predictive forward PE, PB, PCF, Cash, etc. 

In my humble opinion, I think it is not going to be very meaningful to go too much in depth into the predictive numerical analysis as nobody can predict the future oil price. 

Furthermore, Covid-19 crisis is almost an unprecedented one-off event in our history, and has negatively impacted the profits of almost all Oil related companies this year, irregardless of how good their past performances were. 

Lastly, nobody has a clue of what is going to happen, whether Covid’s future or OPEC’s decision? 

There are just too many unknowns! 

Will we find a vaccine, so that the world economy will be back to pre-covid situation in no time? Or will the world economy continue to shrink in a prolonged depressed manner? Or will renewable energy be developed fast enough so that we can be significantly less reliant on the consumption of Oil and Gas? Will OPEC come to an agreement or will they continue to increase the supply? 

Without any ability to sniff out the future, it is going to be futile to predict the future earnings of these companies! 

WHY I AM BUYING 

But I am buying! Why? 

The Oil companies mentioned earlier are all Oil Giants with huge market capitalisations. All either have ample cash, or at least have easy access to credit facilities. 

Hence, I don’t think that they will go bust because of this crisis. Or at least the chances are very minimal. 

As mentioned earlier, the prices are all at all time low and merely above March low. Personally, I do not believe a second wave will be as serious as the first. 

Therefore the chances of a “huge percentage” price dip is probably lower than the chance of recovery in my opinion. 

Read: Why Even a Covid-19 Second-Wave Will Not Crash the Stock Market by Much?

Oil and Gas is cyclical, and I do not believe these Oil Majors will just collapse and disappear in time to come! There will be times of difficulty and time of prosperity. 

Read: Is The Oil & Gas Industry Really Hopeless?

Hence, I am bullish rather than bearish in the long term. 

That being said, I am not saying that oil price or share prices of these companies have hit their absolute low and will not go lower! We simply don’t know. 

WHAT I AM BUYING 

For perspective reason, below are their Trailing Twelve Months (TTM) figures as of 2Q2020. 

          TTM PE ratio (dividend)

  • XOM - 20 (10.4%)
  • RDS - negative (5.3%)
  • CVX - negative (7.1%)

  • Sinopec - 5.6 (11.4%)
  • PetroChina - 7.8 (6.5%)
  • CNOOC - 4.74 (8.8%) 

Looking at the TTM figures, Chinese Oil companies seems to have an edge over the Western ones! 

Also, I think that China will recover faster in this pandemic compared to the rest of the world. The internal consumption will help to propel recovery for China. 

SINOPEC (386)

I had chosen Sinopec not because it has the best metrics. In that aspect, CNOOC fares the best maybe! CNOOC has a comparatively better ROE, ROA and profit margins and better cash over debt position! 

Nonetheless, I am more skeptical about the business of Exploration and Production (E&P), where both PetroChina and CNOOC are more dominant in. 

It is generally assumed that E&P activities are more risky and volatile compared to refinery. E&P companies will require lots of debt and are in higher overall liability position in order to finance their capital-intensive operations. And in my opinion, the non-current assets are also subject to greater risks of sharp depreciation, should any Exploration efforts fail or met with a mishaps. 

On the contrary, Sinopec specialised more in refining, and is the largest refiner in China accounted for about 40% of China’s total refinery throughput. I felt that this could also favor the local consumption model of China more than the other two! 

In terms of TTM PE ratio and dividend, Sinopec also stands out! 

Lastly, Sinopec also has two Petrol Kiosks in Singapore already! 



Source: https://www.facebook.com/sinopecsg/

Imagine one day, Sinopec have more and more Petrol Kiosks all over Asia countries competing with Shell and Esso? 



2 comments:

  1. Thanks for your insights. I'm 31 years old, just started investing, hope is not too late. :X
    Currently have a small position in Sinopec and Royal Dutch Shell. Huat Ah!

    ReplyDelete
  2. Hi MLC, its better late than never. I started investing when I was your age. Huat Ah! Reminds me very fast of another CNY coming! 2020 just flies!
    :-)

    ReplyDelete