Monday, December 1, 2014

Do you own companies in the O&G sector?

If you invested in any O&G company in post GFC. You are most probably staring at losses. If you bought more than 1 year ago, it should be "ouch"

In fact, it is during these moments of loss, that it provide a very opportune moment to stare at yourself at the mirror and ask if your mind is really in coherence with your method.

I am vested with SCI with paper losses too. 

I have always worried about marine being a drag, but I thought I have gotten it cheap at 4.6. 

How do I feel?

Nothing. And call me shameless, delusional, I am proud of it. 

It took me almost a decade for this mental state. Everyday, I read about oil prices collapsing, to a low of even $40. I do not agree with that, because way before that, shale and several OPEC countries will be fighting for their life. When people fight for their life, creative solutions abound. How about$50, I don't know, and I am not really interested. 

These are the reasons for me  buying SCI, and if you regret it now. You mind is at loggerhead with your method, and u will get into trouble sooner or later.

1) I do not know the bottom. I know SCI will continue to pay dividends althought they might reduce it.

2) Assume Marine earning half, and utilities remain status quo for the next few years, dividends should still flow if they increase payout, even if they keep to the current payout. 10 cents a year of panadol, is not too bad.

3) The longer the drought, the stronger the rebound thereafter. How about a drought of 5-10 years. That is pretty scary, but hey, if you say you are a long term investor who will pick up a bargain, u now know if u mean what you say. Or are u having second thoughts now? Are you thinking how come no stop loss? Why not sell now buy later. Nothing wrong with stop loss or buy now sell later, at long as they are your plans at the initial stage when you click the buy button. To say things have changed, and I am selling now, my plan do not work, could means seriously that u have to change first for your plan to work. 

4) I will most probably have chance to buy ST and SCI soon. If it falls not too badly, the dividends will heal itself, if it falls badly, the yield and entry gets better. 

5) so, am I betting on a recovery soon? You must be kidding? The upcycle just ended. Even if oil goes back to $80
And above, the rigs orders will not come fast and furious.

6) there are better alternatives. This is my weaker link. But do understand good news and valuation are usually negatively correlated.

Are you asking yourself plenty of questions? Are you panicking? 

Ask why. It is important 

16 comments:

  1. Thank goodness l have pressed the reset button earlier :-

    http://sgchest.blogspot.in/2014/08/the-aftermath-august-2014_17.html

    I have killed both Semb Marine and SCI during that time.

    When it is time to let go then just do it.
    Do not procrastinate.

    During a slump, do Not expect any quick recovery.
    If there is a quick then it is a bonus.
    In almost all investments (be it in O&G, Financial institution, etc etc) there are risks involved.

    ReplyDelete
    Replies
    1. Money honey!

      Great, it's good that u have a sound plan for entry and exit.

      SMOL, will agree with that for sure.

      But I read too many flip-floppers. Analysts were mostly giving hold and sell call when I buy YZJ.

      Analysts again were giving buy calls near the peaks for ST and semb.

      Analysts report is correlated with good news it seems, at least most local bokerages seem so ... But valuation is negative correlated with good news ....

      Delete
    2. I did not read any analyst reports.
      Missed their buy calls.

      Am wondering whether analysts have sell calls on semb marine and sci when l have them away previously?

      Delete
  2. During times of crisis different type of investors react different. Some see only doom ahead and sell off in fear.
    I think for value investors, the focus should be on the fundamentals and not price only.

    For SCI I think the utilities will definitely continue to generate stable earnings as most of its output is locked in via long term contracts, this area alone should have not problems covering the potential 15-20 cents dividend payout (SCI normally pay 1/3 of earnings out as dividends).

    However fundamentally the Marine business could be severely impacted by the lower oil prices as their customers may choose to cancel existing projects or defer capex, if Semb Marine wins less orders in 2015 and 2016, we could see future earnings falling off. Short term wise, they still have over 12 billion worth of orders stretching into 2019, so 14/15 earnings should remain stable. 2016 onwards is really hard to say, it could fall sharply if oil remains low for an extended period of time.

    As a value investor, as long as the company's fundamentals are still good, I'll always welcome lower prices!

    However having said so, I think kep corp and semb corp are still solid blue chips and I will avoid small cap O&G related counters which are heavily geared.

    Be greedy when others are fearful

    ReplyDelete
    Replies
    1. Hi Felix,

      Agreed. Also, SCI and Keppel are not pure Oand G play

      I will not be getting Sembmarine for e.g. Even if it's survival is not a issue.

      However, it's the small
      Players that you will find baggers. I passed la.

      Wonder when it's your all in ? lOL

      Delete
    2. still buying SCI as it becomes cheaper
      will go all in at $4.00 support level (close to European crisis bottom, not expecting GFC levels)

      if it breaks below $4.00 so be it, just hold for a few years and slowly collect dividends
      I'm using cash and SCI is temasek backed, so I'm not too worried if the price continues to slide eventually it will recover but may take a long time, need a lot of patience

      However those who use margin or CFD would have a tough time as margin calls keep fueling the sell off.

      Delete
    3. Hi Felix, thank you for telling me your show hand price. Missed your post.

      Delete
  3. if you want margin of safety and value SCI with only their utilities and minimal of their marine business, wouldn't you be paying overpriced for it since theoratically their earnings is like 20 cent. their pe is like 20 times.

    secondly, there is a transparency issue. u see how many of these utlities are developed recently. now call me skeptical but if you see the capex at cityspring and sp ausnet that have been stable, there are still capex involved. how sure are we that these utilities are cash flow generating. i was thinking along this line when i wrote my sci article. but i think about it. perhaps not. they are still paying out of marine business.

    ReplyDelete
    Replies
    1. Kyith,

      I think you misunderstood me. I mean I value marine at half their earnings and utilities at status quo.

      I agree thou there will be MOS if only utilities is measure at at fair value of 12-15 time then. Anything between $2 to $3 is cheap.

      The issue is I do not think SCI will go there. Assume there is a drought like many suggest, marine is still kept busy till 2017. Thereafter a sharp fall will follow. Will o and g recover in 2 years?

      Most prob not. A worst case scenario like what u describe, the utilities projects will then be up and running.

      Again I also agree there is risk of overrun costs and even when operational, electricity rates to be charged.

      At that point of time, SCI could well be at $2.

      I think I will still buy as I believe if SCI can go to the dogs with it's utilities gone ... Singapore is ....

      As for FcF, and that they are only paying from marine ... I will check again.

      Iirc, it seems unlikely that the 60% dividends from marine can form the bulk of 30% dividends from SCI ...

      Delete
    2. If you read around local research reports on SCI, most analyst value the utilities business at around $3 per share. So at the current price of $4.20, the market is pricing the marine business at crisis levels. With a solid 50 years of track record, I think the marine business will definitely survive and continue to be profitable. However short term, the stock price may continue to be very volatile so this stock is definitely not for the weak hearts, especially if there is any cancellation of marine orders there may be even sharper drops.

      Vested and still accumulating as it gets cheaper and cheaper (hold for long term, not for short term speculation)

      Cheers ^_^

      Delete
    3. Kyith what do u mean by transparency issue?

      if you dig into SCI's annual report I think all the details are there, actually I feel there's too much information, way a lot more than cityspring infra for sure.

      But yeah capex for SCI has been extremely high, also they are building power plants in India and China in which they recently just issued 7 year and 12 year bonds for the projects. For the Utilities business SCI is in more of a growth stage than a mature one as compared to Sp ausnet or city spring, thus capex rising is logical I guess

      someday when the Utilities business becomes mature I think they will likely to listed it (imagine semb corp power), in which value will be unlocked, however this may take many years (say 3-5 years)

      Delete
  4. This comment has been removed by the author.

    ReplyDelete
  5. Also I forgot to mention for the marine business
    2/3 of it is the construction of oil rigs, which is greatly affected by low oil prices (if they cannot make profits drilling the oil, they shut the oil rigs down and future rigs delivery get cancelled)
    however 1/3 of their marine business comes from ship repairing which is a pretty stable business, not too much affected by lower oil prices
    hopes that gives u guys a better full picture
    like what warren buffet often says, risks comes in what you don't understand or if one goes out of his circle of competence

    ReplyDelete
  6. Hi Felix,

    Thank you very much for your balanced analysis.

    Indeed, the risk of cancel orders is one that will really affect the price, but maybe not the moat.

    The Brazilian drillships in particular are worth watching as it is their recent expansion.

    The utilities track record is almost impeccable for the past 13 years. That means something to me, I
    Not saying it will continue to grow, or that it won't fall. It might hit some bumps and take some
    Lousy quarters or years. But such a business I believe is fair in terms of PE valuation and is getting value even when using yield metric. It is almost 4% yield now.

    The very important thing is, after the initial high Capex years in utility projects, will cash flow improve? Look at it's track records, even the problematic one in UK.

    Marine is everybody poison now. But I see the capabilities as part of the valuation and not just numbers.

    ReplyDelete
  7. I bought more SCI today, if it drops further so be it, I really don't know when is the bottom.
    Just lock in up and hold for a few years, slowly collect dividends and not think too much

    ReplyDelete
  8. I forgot to add, SCI bonds are currently doing very well!
    maybe investors are just fearful of oil related equities

    ReplyDelete