Editor’s Note: This article had made mistakes pertaining to Kris Energy’s business operations and share price movements. The mistakes have been corrected with deletions done via strike-throughs and additions made in italics. The Fool regrets the error. As the weeks pass, it seems that lower oil prices might be here to stay. No one can know for sure (that includes me), but if that really is true, companies in the oil & gas industry might need to readjust their expectations for growth in the future. Let’s take a look at three such companies. The overly ambitious Ezion (SGX: 5ME), a service…
Editor’s Note: This article had made mistakes pertaining to Kris Energy’s business operations and share price movements. The mistakes have been corrected with deletions done via strike-throughs and additions made in italics. The Fool regrets the error.
As the weeks pass, it seems that lower oil prices might be here to stay. No one can know for sure (that includes me), but if that really is true, companies in the oil & gas industry might need to readjust their expectations for growth in the future. Let’s take a look at three such companies.
The overly ambitious
Ezion (SGX: 5ME), a service provider to oil rigs, has expanded its business at a breakneck pace over the past few years. From a revenue base of US$57 million in 2009, the company has grown its top-line impressively to U$365.7 million over the last 12 months.
But, Ezion has financed most of that growth through borrowings. At the end of 2009, the company had net-debt (total borrowings minus total cash) of US$89.4 million; as of 30 September 2014, the figure was US$1.16 billion. The firm’s total debt to equity ratio is also now at 132.8% – and that’s not low at all.
Now with price of oil having fallen by almost half since June this year, the outlook for Ezion is not looking bright. That’s especially so when the company had wanted to expand its business activities earlier in the year with a move into the drilling and exploration of oil itself.
Coming back to Ezion’s traditional business of providing support services, many of its customers might cut down on their own capital expenditures if the price of oil remains low for a prolonged period of time, leading to much lesser jobs available in the market. This might lead to a price war among competitors, potentially resulting in lower margins for Ezion. Investors would need to watch Ezion’s balance sheet to ensure that the company’s not over-stretching itself in a soft market.
The hardest hit
Exploration and production outfit KrisEnergy Holdings Ltd (SGX: SK3) is in a tight spot now. Just as it increased its borrowings (KrisEnergy issued S$200 million and S$130 million worth of notes on August and June 2014 respectively) to finance its operations for some of its oil wells that are ready for production, the price of oil started its drastic drop.
Like all commodity producers, KrisEnergy has no control over the selling price of its product (oil).
With most of its wells being analysed when oil was at a much higher price, the company might have to swallow lower-than-expected revenue and profits from those wells. Lower oil prices might mean lower revenue for the company in the future. But according to KrisEnergy’s investor relations department, some of its wells were appraised under the assumption that oil would be priced at US$60-US$70 per barrel. That’s not too far from crude oil’s (WTI) current price of around US$56 per barrel and so, negative impacts from the slump in oil prices might be softer than first thought. Moreover, 82% of KrisEnergy’s current production is actually in gas and those are mostly tied to long-term contracts – these also help the company even out the impacts from volatile oil prices. The market is certainly not taking these developments lightly – shares of KrisEnergy have declined by nearly half to S$0.655 since the start of the year. Still, the market is worried about the prospects of KrisEnergy in 2015 with its shares dropping more than 20% from S$0.825 at the start of November to S$0.655 currently.
The unlikely victim
Although Boustead Singapore Limited (SGX: F9D) is much more diversified when compared to the other two shares mentioned, the company still counts the oil and gas industry as one of the major industries it serves; in FY2014 (financial year ended 31 March 2014), Boustead’s oil and gas-related business segment accounted for 35% of total revenue.
In a recent investor day presentation, the company mentioned that enquiries for its oil & gas-related business halved during the Great Financial Crisis of 2007-09 (that was also a time when the price of oil fell to below US$40 per barrel near the end of 2008). So if history is anything to go by, it seems highly unlikely that Boustead will be able to escape entirely unscathed from lower oil prices this time around.
The lives of companies operating in a commodity business is never boring. Without any pricing power for their products and services, these companies operate at the mercy of the market. When the market turns, investors can then know which of the companies have not been preparing for potential storms. Or as Warren Buffett puts it, “only when the tide goes out do you discover who’s been swimming naked.”
For those wanting to find out which companies might benefit from lower oil prices, check out here.
Click here now for your FREE subscription to Take Stock Singapore,The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.