With Strong Share Price Gains Since Oil Prices Collapsed, Can Lower Oil Prices Really Save This Company?

With the price of oil having fallen by more than 60% from its 2014-peak, companies that see oil-derived fuel as a big component of their operating costs have seen their share prices soar (the airlines are a great example).

Shipping outfit Neptune Orient Lines Ltd (SGX: N03) also seems – at first glance – to be a beneficiary of lower oil prices. In 2013, Neptune Orient Lines had spent approximately US$1.50 billion on bunker costs (bunker is a type of fuel typically used by vessels); that’s around 17% of the company’s revenue of US$8.83 billion for that year.

The market also seems to think that lower oil prices will be a boon for Neptune Orient Lines given that its impressive 18% gain in share price over the last three months coincides with the sharp decline in the price of oil.

But, there are reasons to believe that any potential advantages Neptune Orient Lines can enjoy from lower fuel costs would be temporary at best.

The situation is perhaps best explained by drawing an analogy between the shipping firm and Singapore Airlines Ltd (SGX: C6L). Both companies are in the transport business (though the clientele’s certainly different) and both belong to industries with poor business economics where intense price-competition is the norm.

In the case of Singapore Airlines, cheaper fuel is an industry-wide phenomena, so it’s just a matter of time before any cost-savings are actually passed down to customers instead of being enjoyed by the company. In fact, there are already signs of this dynamic happening in the airline industry. There’s no reason to believe all these won’t happen to the shipping industry too.

But whereas Singapore Airlines has a strong balance sheet and is considered a really well-run airline, Neptune Orient Lines is laden with debt.

The shipping outfit’s total debt to equity ratio is really high at 259%, and its EBITDA to interest coverage ratio (a measure of how easily a company can service its loans) is only at 1. The latter figure shows how tight Neptune Orient Lines is with regards to its cash flow. The company really ought to try and make use of any extra breathing space it has – courtesy of lower fuel costs – to double-up its efforts to turn itself around.

Foolish Summary

There are many challenges for Neptune Orient Lines to overcome given its dreadful business performance over the past few years. For instance, it’s been close to six years since the financial crisis’ worst days ended in 2009, but the shipping outfit has yet to recover, clocking losses in most years since then.

Early last year, the company even announced that it might be placed on a watchlist maintained by the Singapore Exchange after suffering three years of consecutive losses; the firm’s streak of annual-losses looks set to continue after it had clocked US$175 million in losses for the first nine months of 2014.

Oil’s price declines are just a short-term blessing for Neptune Orient Lines. The company still needs to address many fundamental issues with its business such as its highly-geared balance sheet and its cost-inefficiencies in relation to its peers.

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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 Stanley Lim doesn't own shares in any companies mentioned.