Just How Bad Is The Oil Price Rout?

There seems to be no respite from bad news for companies in the oil & sector. The price of oil tumbled last night to below US$35 per barrel at one point, a price last seen only in 2009, amid jitters of a pricing war between OPEC members and non-OPEC countries.

What actually happened?

On 4 December 2015, the Organisation of Petroleum Exporting Countries (OPEC), led by the world’s largest oil exporter Saudi Arabia, decided to abandon its output ceiling.

In other words, OPEC is not going to limit its production levels to control prices. Instead, it is going to continue pumping out oil in what seems like a move to squeeze out other players in the market like the U.S. shale drillers and Russia.

Following the OPEC meeting, Iran’s deputy oil minister’s comments over the weekend also seemed to have spooked the crowd. He said that there is “absolutely no chance” that the country will hold off production of oil to prop up prices while it re-enters the market. Iran’s currently under sanctions and when they are lifted sometime in 2016, the country looks to be eager to start pumping out some oil to sell again.

Oil & gas companies hitting lows

As the price of oil continues to hit multi-year lows, many companies in the industry are facing the heat. Here is a small sample of negative announcements from such firms over the past year:

  • Mencast Holdings Ltd (SGX: 5NF) had issued new shares earlier this month to shore up its deteriorating balance sheet.
  • Rig and vessel builders Vard Holdings Ltd (SGX: MS7) and SembCorp Marine Ltd (SGX: S51) have both seen cancellations of orders from customers. Vard’s case involves one of Brazil’s largest oil & gas transportation firms, Petrobras Transportes S.A. while SembCorp Marine’s cancellation came from Marco Polo Marine Ltd (SGX: 5LY). On a related side-note, SembCorp Marine and Marco Polo Marine are currently involved in a dispute over said contract cancellation.
  • Sticking with SembCorp Marine, the firm had even announced at the start of this month that it is is expecting a loss in the fourth-quarter of 2015.

The table below also gives us an idea of how the negative sentiment in the oil & gas industry has hammered some oil & gas stocks over the past year.

Company Share price change (15 Dec 2014 to 14 Dec 2015)
Keppel Corporation Limited (SGX: BN4) -22.3%
SembCorp Marine -41.8%
KrisEnergy Ltd (SGX: SK3) -56.6%
Ezion (SGX: 5ME) -46.9%
Rex International Holding Ltd (SGX: 5WH) -75.7%

Source: S&P Capital IQ

As you can see, the share prices of the companies in the table above have fallen steeply, down from 22% to a whopping 75%. While it’s not a complete sample of the entire oil & gas space, I believe the table is a good representation of how most oil & gas stocks in Singapore have performed over the past year.

With all that said, the question that I believe many investors will be interested in is this: When will the price of oil rebound?

An imminent rebound… or not

According to a recent International Energy Agency (IEA) report, oil prices are projected to recover, albeit at a slow and intermittent pace, with the supply overhang slowly easing throughout the rest of the decade. In fact, the IEA also foresees that oil prices will hit some US$80 per barrel in 2020.

But, those are just forecasts and they may well be wrong. If there’s an environment of low oil prices in the next few years at least, it would not bode well for oil & gas companies, especially for those that are heavily in debt. Investors who wish to sift through the wreckage of oil & gas stocks for bargain-hunting may want to think about the odds that a company can survive in a prolonged period of low 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 contributor James Yeo doesn’t own shares in any companies mentioned.