03 Dec Oil Shock Creates Opportunities on SGX
Crude oil tumbled to 5-year low, sending oil and gas stocks downwards.
Will oil price continue to go down? I do not know.
What I know is that there are enough attention and bearishness about oil prices and that smells like opportunities to me.
This prompted me to look at the oil and gas stocks listed on the SGX. According to the FTSE Industrial Classification Benchmark (ICB), SGX has 31 oil and gas stocks, shown in the table below.
|Name||Symbol||Stock Price||5-year price change||1-year price change||PE||Debt-to-Equity|
|China Aviation Oil||G92||0.68||-27.40%||-18.40%||6||201%|
|Universal Resource & Svcs||W81||0.063||-69.30%||-38.20%||30||7%|
|Lereno Bio Chem||587||0.003||-80.00%||-40.00%||0||-106%|
Let me guide you to read it.
Positive 5-year Returns – You must be doing something right
We know that businesses fight for market share within the industry all the time. Winners stay and capture shares from the losers who eventually leave the market.
How do you know who is doing things right? A quick proxy is to look at the 5-year price change.
Those stocks with positive returns over a 5-year period in a somewhat stale oil and gas industry tell you that their earnings should be growing, capturing market share from those stocks which their prices have declined tremendously.
In short, 5 years is a meaningful period for stock price to reflect fundamentals.
From the table, we can see Ezion, SBI Offshore, Gaylin, MTQ, Interra Resource, Keppel and Sembcorp Industries qualifying this criteria.
Negative 1-year Returns – You might be a bargain
Those stocks with positive 5-year returns may present as bargains if only their prices have dropped significantly within the past 1 year.
This drop is typically catalysed by a big event that affects the entire industry. The drop must not be due to bad news from an individual company. In this case, the price drop is across the oil and gas industry triggered by the plunge in oil price.
Applying this second criteria, we will have to drop SBI Offshore, which has gained 268% in the past year! I am not going to chase a running stock.
We are left with Ezion, Gaylin, MTQ, Interra Resource, Keppel and Sembcorp.
Low PE – You are not overcharging for earnings
PE ratio for STI is about 13 now. My opinion is that anything below 15 is fair. Of course, the lower the better, means the lesser we pay in multiples of earnings.
Applying it to our remaining stocks, we would eliminate Gaylin which have a PE of 22.
Now we have Ezion, MTQ, Interra Resource, Keppel and Sembcorp.
Low Debt-to-Equity – You are not carrying a big burden
*Please note that the debt-to-equity ratio was calculated based on total liabilities. It should theoretically include debts only and exclude items like payables. Hence, the debt-to-equity ratio is higher than it should be.
Companies in a slumping industry must survive the tough times. The oil and gas companies must be able to stay in business as long as oil price remains depressed.
Having high debts and liabilities are not going to help. Hence, having a low debt-to-equity ratio gives more assurance for survival. Benjamin Graham would have accepted anything below 200%. This makes all the remaining five stocks qualify for this criteria.
We must also accord extra assurance to Keppel and Sembcorp Industries as they have strong backing from Temasek Holdings. They are likely to receive liquidity boost when needed.
This is a simple screening that I have devised. Hope you can see the logical flow on how the screen is set up.
The screen is helpful to narrow down to a handful of stocks to look at. You should study the companies further to qualify them.
Is the price right? I am not sure. Each of us has a different level of comfort. What is cheap to one may not be cheap to another. Some of you may use technical analysis to get a price entry. Some of you may put the stocks on watchlist and monitor some more. Some may have even invested.
The lesser stocks you have, the more investigations you have to do. As the gain or loss per stock is going to have a big impact to your portfolio returns. You can afford to do less work if you have a good diversification.
The principle of value investing works. You would do fine as long as you collect decent stocks at cheap prices.
Disclosure: I do not own any of these stocks at the point of writing. This article is not a recommendation to buy. The aim is to share how to apply logic to shortlist stocks in an industry that is hurt by oil prices.