The ongoing rout in the price of oil is a great reminder of how volatile – and unpredictable – the commodity can be. Brent crude was at US$115 per barrel only in June this year; it is currently sitting near US$70 per barrel after OPEC (Organisation of the Petroleum Exporting Countries) had recently refused to cut its production of oil.
Renowned financial journalist Jason Zweig also reminded investors about this particular characteristic of oil prices as he noted the following in a recent article of his that appeared in the Wall Street Journal (links are his):
“In 2008, as the price of oil brushed past [US]$145 a barrel, analysts rushed to get out ahead of the “trend” with their predictions of where the price was ahead. Goldman Sachs called for oil prices to hit [US]$200; at least one veteran observe of the industry foresaw the price reaching [US]$300.
Right on cue, oil went down, not up – divebombing 77% between July and December 2008 and bottoming barely above [US]$30 a barrel. Analysts then hastened to reverse their projections, just in time for oil prices to go right back up.”
I guess it’s obvious to see that there’s plenty of uncertainty involved with how oil prices would move. Falling oil might just stop today, rebound, and then never look back ever again – or it could continue sliding to reach its 2008 lows. No one knows for sure.
Volatile oil prices are a difficult situation to handle for oil & gas-related companies because the health of their businesses are influenced by the price of the commodity, some much more than others. It’s for this reason that investors should be thinking about which are the companies best/least able to see through any further decline in oil without their survival being threatened.
There are currently 54 oil & gas-related shares listed in Singapore (this includes the drillers, service providers, and rig builders). I’ve looked at some of the weakest companies within the group; so now let’s take a look at the strongest bunch.
Specifically, I’m looking for oil & gas-related shares which have the following financial characteristics:
- Generated positive operating cash flow in each calendar year between 2007 and 2009 (I’ve omitted shares when no such info’s available).
- Generated positive operating cash flow in 2012, 2013, and over the last 12 months.
- Have a net-debt to equity ratio (where net-debt equals to total borrowings minus total cash) of less than 20% currently.
The first characteristic is significant because, as mentioned earlier, the price of oil collapsed in 2008; oil & gas shares that managed to still generate positive cash flow from operations during that period are likely to be the ones with better operational efficiency and have a stronger ability to generate cash from their operations on a regular basis.
Meanwhile, the second characteristic is also used to pick out the firms which are best able to generate cash flow from their businesses. Lastly, the third characteristic – which screens for shares with stronger balance sheets – is meant to filter for oil & gas companies which are facing the least financial risks.
Of the group of 54, it’s the following shares which came through (in descending order according to the strength of their balance sheets): CH Offshore Ltd (SGX: C13), Sinwa Limited (SGX: 5CN), Interra Resources Ltd (SGX: 5GI), Mermaid Maritime Public Company Limited (SGX: DU4), MTQ Corporation Limited (SGX: M05), ES Group (Holdings) Limited (SGX: 5RC), and Keppel Corporation Limited (SGX: BN4).
Source: S&P Capital IQ
My screen has shown us that the aforementioned septet is likely to be the best-positioned to ride out the ongoing storm of falling oil prices. But it must still be noted that none of these is to meant to say that these shares won’t fall further if oil prices continue sliding, nor is it meant to portray the idea that they are definitely safe from financial distress; investors would still have to dig deeper into these shares to get the best picture on how strong their businesses really are.
For more (free!) investing analyses and important updates about the share market, check out the Motley Fool's weekly investing newsletter Take Stock Singapore. This free newsletter can teach you how to grow your wealth in the years ahead, so do check it out here.
Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.
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.