Crude oil prices have spiked 30% year to date. This is great news for companies that operate in the oil and gas scene, such as China Aviation Oil (Singapore) Corp Ltd (SGX: G92), Sembcorp Marine Ltd (SGX: S51) and KrisEnergy Ltd (SGX: SK3).
However, at the same time, rising oil prices can also have a negative impact on companies that are end-users of oil. Two such transport companies in Singapore stand out – Singapore Airlines Ltd (SGX: C6L) and ComfortDelGro Corporation Ltd (SGX: C52). Here are some things to keep in mind when dealing with these two companies right now.
Airlines companies biggest users of fuel
Airlines are some of the biggest end users of fuel. In the April-June quarter, Singapore Airlines reported a 16.1% decrease in operating profit, excluding one-off items. This was despite revenue remaining largely stable. A big reason for the steep decline in adjusted profits was higher fuel costs. Net fuel cost increased by S$154 million, or 16%, compared to the corresponding quarter last year.
Worryingly, the decline came about in the second quarter of the year, when oil prices were slightly lower. With crude oil prices rising even further this quarter, Singapore Airlines could face even more cost pressure, narrowing profit margins further.
Singapore Airlines currently hedges 46% of its fuel requirements for the next four years at a price of US$65 to US$70 per barrel. However, its unhedged requirements will certainly be impacted by the rising crude oil prices in this quarter and next at least.
Land transport businesses not spared either
Comparatively, land transport fuel requirements are but a fraction of what airlines require. However, rising oil prices can still impact margins and squeeze profits. ComfortDelGro’s business includes operating bus and rail services. In its 2017 annual report, the company said that it was “exposed to fluctuations in fuel price in its bus and rail operations and direct sales business”.
In the second quarter of 2018, its fuel and electricity expense rose S$20 million or 35.8% year-on-year. Fuel and electricity expenses make up around 10% of its total operating expenses.
As of the end of 2017, ComfortDelGro did not have any outstanding fuel hedges.
The Foolish bottom line
Oil price fluctuations can have a very real impact on the profitability of companies. Investors should be aware of how such macroeconomic conditions can impact their stock investments.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.