These Shares Are Facing the Most Risks Due To Falling Oil Prices

Recent news of OPEC’s (Organisation of the Petroleum Exporting Countries) decision to not cut its production of oil has exacerbated a decline in oil prices. The 12-nation OPEC is responsible for a third of global oil output.

In October this year, Brent crude had already fallen from US$115 per barrel in June to just US$90 per barrel; OPEC’s latest refusal to reduce its supply of oil to the world has left Brent crude at near US$70 per barrel currently.

This has been extremely unwelcome news for all oil & gas-related companies (drillers, support services providers, and rig builders) listed in Singapore. As of 4 November 2014, there were a total of 54 such shares here, according to the Singapore Exchange. The largest of these by market capitalisation are, in descending order, Keppel Corporation Limited (SGX: BN4), Sembcorp Marine Ltd (SGX: S51) and Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6).

Share Market Capitalisation (as of 30 Nov 2014)
Keppel Corp S$16.36 billion
Sembcorp Marine S$6.54 billion
Yangzijiang Shipbuilding S$4.69 billion

Source: S&P Capital IQ

Since the start of June, the 54 oil & gas companies’ shares have suffered an average loss of 16% as of 30 November 2014. This is in stark contrast to the 1.5% gain that the SPDR STI ETF (SGX: ES3) has experienced in the same period; the SPDR STI ETF is a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

When the price of oil is low, there’s less incentive to drill. This leads to a lower need for support services and also lesser capital expenditures being planned for, which would in turn affect the rig builders.

No one really knows when the price of oil would start climbing again (as it is, the price of commodities are incredibly hard to predict) and if it falls even further from here, it’s only going to cause more pain for the oil & gas companies in Singapore.

It thus pays to think of which oil & gas shares are facing the highest risks in the event that their businesses slow down even more because of a further decline in oil prices. Although pain will likely be felt across the board, not every oil & gas share’s facing the same level of risks. And on that note, the ones most at risk are those which have the heaviest leverage and the least ability to produce cash flow from their business operations.

With these two thoughts in mind, I screened for oil & gas companies with negative operating cash flow over the last 12 months and then ranked them in order of their net-debt to equity ratios (where net-debt equals to total borrowings minus total cash).

The top five oil & gas shares with negative operating cash flow and the highest net debt to equity ratios are namely Jasper Investments Limited (SGX: FQ7), Vallianz Holdings Ltd (SGX: 545), Linc Energy Ltd (SGX: TI6), Swiber Holdings Limited (SGX: AK3), and Cosco Corporation (Singapore) Limited (SGX: F83). It’s worth pointing out that all five shares have net borrowings which are higher than their equity – this isn’t what a strong balance sheet would normally look like.

Share Net-debt to equity ratio
Jasper Investments 3,039%
Vallianz 253%
Linc Energy 143%
Swiber Holdings 131%
Cosco 129%

Source: S&P Capital IQ

Of course, a simple screen like this can’t tell us for sure what’s going to happen next to the price of these shares. But what the screen can tell us is that these firms are facing very high financial risks given their fundamentals. Investors in these shares thus ought to think hard about whether their businesses can survive any possible further rout in oil prices.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.