Sunday, 4 September 2016

My Oil & Gas Fightback

Finally, we have come to the grand finale on the Oil & Gas (O&G) series. When I started writing on O&G stocks in May, I did not think that I could write 14 posts on it. This final post summarises the initial ignorance on the severity of the oil crash, the mid-way realisation that something was amiss and the subsequent adjustments in investment strategies. This journey has not been a straight path. Along the way, mistakes were made, trial-and-error adjustments were carried out, inconsistent investment strategies were executed while trying to understand the full picture, etc. The journey has not ended, and it remains to be seen whether the current investment strategies could withstand the test of time, but there are reasons to be cautiously optimistic.

The Initial Ignorance

Even before the oil price crashed in Jun 2014, I had a couple of O&G stocks in my portfolio. But when O&G stocks started to crash in Oct 2014, I decided to pick up a few more of them. It was a classsic case of value investing, whereby stocks with good earnings fell and became "undervalued". When earnings and stock prices temporarily diverge, there are only 2 ways they would re-converge. Either the stock prices recover, which means value investors make money, or the earnings fall, which means value investors got stuck. At that time, it was widely assumed that the fall in oil price was only temporary and it was a matter of time before stock prices recover. Unfortunately, it was earnings that fell instead of stock prices recovering.

Looking back at the mistakes made during this period of time, I would not be too hard on myself. Like a chess game, there are only a few opening moves. Very few people would think 50 steps ahead of it. My usual steps before initiating a position in a stock are to check on past earnings, future prospects (as described by the company in the financial statements), balance sheet strength, cashflows, etc. If the above checks are satisfactory, the stock price is reasonable and the overall stock allocation is within limits, the stock would be purchased. If I think too long, I might just miss the opportunity.

Although O&G stocks are in a very bad shape, the above checks have nevertheless helped to sieve out companies with high debts and allow the problem to be more manageable. Among the O&G stocks in my portfolio, only Keppel Corp and KrisEnergy (more on this stock later) have debt/equity ratios above 50%. The worst perfoming stock in my portfolio, MTQ, has a debt/equity ratio of 39%. There is a fighting chance that both Keppel Corp and MTQ will survive the harsh and long winter.

The Mid-Way Realisation

The consensus in Dec 2014 was that the oil price collapse was only temporary and would soon recover to its original level prior to Jun 2014. However, as time passed, the anticipated recovery in oil price and O&G stock prices did not happen. It was around mid 2015 that I realised something was amiss and began to adjust my investment strategies in O&G stocks. The investment strategies then were fairly inconsistent as I tried to figure out the full picture. Although I realised that the downstream sectors were more stable than the upstream sectors, I nevertheless went ahead to buy Keppel Corp at $6.82 in Sep 2015. It was just too attempting to pass up the offer, considering that I had sold it at $8.20 just 2 months ago. 

The revised investment strategies are discussed in the sections below.

Exploit Weaknesses in the Attack

As we now know, OPEC decided to flood the market with oil to remove other competitors and win back market share. This is bad news for the upstream O&G companies which rely on oil majors and drilling contractors for their business. However, even the best attack has some weaknesses. The more oil OPEC countries pump to increase market share, the more oil that needs to be transported, processed and stored. This actually benefits the downstream O&G companies that build and maintain petrochemical plants, storage tanks, oil terminals, etc. Rotary was the first stock to be averaged down in Apr 2015 based on this strategy, but it was too early and the price fell further. PEC was averaged down in Oct 2015, Hiap Seng was added in Jan 2016 and Hai Leck was added in Jun/Jul 2016. For more information on the downstream O&G companies, you can refer to My Downstream Oil & Gas Recovery Operations.

Avoid Frontal Attack

The oil crash severely affected every sector on the upstream side, starting from Exploration & Production (E&P) and following the industry value chain down to oil services, Offshore Support Vessel (OSV) and ship/ rig building (see the industry value chain in The Missing Link Between Oil Price & O&G Profitability). However, there is usually a timing delay as the effects move downwards due to contractual obligations. The storm is currently fiercest in the oil services and OSV sectors. Both Technics Oil & Gas and Swiber are in judicial management. Although ship/ rig building companies look better than oil services and OSV companies financially, it is mainly because the full force of the storm has not hit them! I have a conceptual model for understanding the various O&G sectors in What Moving Averages Can Teach Us About O&G Stocks.

Therefore, if possible, it is best to avoid companies in the oil services, OSV and ship/ rig building sectors. Unfortunately, it is easier said than done. Even I have stocks in these sectors. Among them, MTQ is at the most risk. I can only hope that both MTQ and Keppel Corp will survive, preferably without the need to raise additional capital via heavily discounted rights issues.

Counter-attack from Behind

The full force of the storm has left crude oil and the E&P sector. It is safe to say that oil price has bottomed out in Jan 2016. I averaged down on Lyxor Commodities, an Exchange Traded Fund that tracks the prices of oil and other commodities, in Jan 2016 and added 3 E&P companies, namely, Interra Resources, KrisEnergy and Ramba Energy (still more on these stocks later), in Jun 2016.

Moving forward, when the full force of the storm leaves the oil services, OSV and ship/rig building sectors, I will be coming in to pick up whatever that is left of these sectors.

Adopt a Nothing-To-Lose Mentality

Thus far, I have discussed my investment strategies in O&G stocks. I am predominantly an investor who prefers profitable companies. However, I also know how to speculate. When going by the book leads to a precarious situation, sometimes not going by the book can turn the difficult situation around. I have small speculative positions in loss-making companies, such as Hiap Seng (loss-making in FY2015, but turned around in FY2016) and the 3 E&P companies mentioned above.

Do not look down on the small size of these positions. It is precisely because they are small that they have the potential to become multi-baggers. Because the positions are small, the money thrown into these stocks are mentally written off the moment they are purchased. In other words, there is nothing to lose on these speculative positions. I cannot emphasize enough that O&G stocks are extremely risky stocks. However, when something extremely risky meets a nothing-to-lose mentality, the risk-reward balance tilts in favour of the latter.

This strategy works only if the position is small enough to be written off. If it is too large, it is difficult to write off the full amount and adopt the nothing-to-lose mentality. Not only that, there is usually a need to diversify as much as possible to reduce the risk of individual stocks really losing money. This is why I have 3 E&P stocks instead of just one. However, this also presents one of the challenges of adopting this strategy. While $1,000 in 1 stock might be easy to write off, a total of say, $10,000 in 10 stocks might not be that easy to write off. 

Moverover, although I talked about "throwing" money, nobody likes to really lose money. Thus, stocks selected under this strategy have some evidence of being able to turn around. If they have no chance of turning around, using this strategy will only mean losing more money.

Moving forward, this will be another of my strategies to pick up O&G stocks on the cheap. Please note that the purpose of this post is not to encourage you to take highly speculative positions. It is a recollection of my O&G turnaround strategies.

Superseded: A Rising Tide Lifts All Boats

Earlier this year, I had another strategy, which assumed that a rising oil price would lift the price of all O&G stocks. This was based on the premise that the market fails to understand The Missing Link Between Oil Price & O&G Profitability, so that all O&G stocks will rise when oil price rises. However, post-Brexit referendum, the rise in oil price has been disrupted. Post-Swiber, the market has figured out that some O&G companies have significant challenges in surviving the long and harsh winter. This strategy no longer works.


The O&G battle has gone on for 2 years already. It will probably not end for another few more years. Personally, this battle has been fairly spectacular, from the initial ignorance of the severity of the oil crash, to a mid-way realisation that the usual way of value investing cannot continue, to development and execution of a set of multi-pronged strategies of exploiting weaknesses in the attack, avoiding frontal attack, counter-attacking from behind and countering high risks with a nothing-to-lose mentality. This battle is no longer just about recovering all the losses, but also about bragging rights. Regardless of the outcome of this battle, it will surely go down as one of the legendary investment battles in memory!

Just a reminder, this post is not a recommendation for anyone to buy or sell any O&G stocks. It is a recollection of my strategies to turn around the O&G stocks in my portfolio.

See related blog posts:


  1. Hi CW,

    *Salute* for the O&G articles for someone who is not in the industry. I enjoyed it very much. Incredibly well-written.

    You are not alone when it comes to thinking it was a temporary dip in 2014. I averaged down too and my exposures were very significant until I pulled out most along the way in from early to mid-2015. However I did average down some too in early 2015 even this year.

    Everyone make mistakes. This long harsh O&G winter is one of the worst in the last 50 years at least, all the experienced experts and big bosses got it wrong. No shame at all for u!

    Still my exposure is in tens of thousands having the same adopt-lose-it all mentality.

    Investment or even life do need some speculative bets too. Should at times go for it as long as it is something that will not kill us nor make us go down to sick bed.

    Most important of all, with the losses, I can see that u had gained tremendous insight to the industry.

    Kudos to you!

    1. Hi Rolf,

      Thks for your compliments. I've learnt a lot from you too!

      I think it is important that we keep an open mind and accept the possibility that our original ideas are wrong and change course when needed. Those who adapt to changes will survive and live to fight another day.

      Yes, speculation can be fun so long as it is well managed. Makes investment and life less boring.

  2. Tough times do not last - tough people do.

    1. but u are boring investor! hahaha just kidding...

    2. There are a few ways of interpreting my blog title:
      1. I am a boring person.
      2. I like my investments to be boring.
      3. I find investing to be boring, so I venture into blogging about anything that relates to investing.

      All the above are correct interpretations of my blog title.

  3. As at 22 Aug 2016, Aberdeen Asset Management (Asia) Ltd. had reduced its stake in KepCorp by 2.3968% since 16 Mar 2015 (from 7.4% to 5.0032%).

    KepCorp's major shareholders:

    1. Thks for the info. Everyone has reasons for selling or not selling.

  4. well, my initial Keppel position starts at 7.10, a long way...

    1. I can understand how you feel. The good thing is Keppel Corp is still a very good company.

  5. The tough time will only start to be off when the era of cheap money is away. Cheap money is the culprit that makes this industries over extend, over invest and extended low margins.