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Saturday, December 24, 2005

SPC @ 4.66 ( Oil / Singapore ) 12 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Medium-term refining margin outlook is weak; demand is plateauing

I believe my latest choice will shock quite a few given the much vaunted tightness of capacity of the oil refining industry since Hurricane Katrina, which has prompted much investment attention on the stock.

Indeed, I have expressed my positive views on SPC previously on one or two forums, on the premise that SPC is well-positioned as the de facto national oil company in a resource-rich region brimming with opportunities; buying of SPC shares by its parent Keppel at prices above $5 further supported my viewpoint.

I sold off my holdings of SPC a few days ago (at a profit given my lower purchase price ~ 9 months ago); readers better take note because I may be writing with seller's bias right now. The key trigger that caused a sea change in my optimism on the stock was the latest Monthly Oil Market Report by the International Energy Agency (IEA) and its revelations on the Singapore refining margins.

Interested fundamentalists can read the details in the reference link below but suffice to say that although I had been expecting the 4Q refining margins to be poorer than 2004's exceptional margins, I had not been prepared for the collapse in refining margins since the late Sep-early Oct upsurge following Katrina. Complex refineries typically make most of their money from hydrocracking (as opposed to the simpler hydroskimming); the Dubai hydrocracking margin for the Singapore refining centre collapsed from an October average of US$6.60/barrel to a shocking November average of US$0.79/barrel. The downtrend for this figure actually continued into the early weeks of December where it became negative ie. it became unprofitable to refine. One may note that on a year-on-year comparison, the corresponding Nov 2004 figure was US$8/barrel while remaining above US$3.50 for Dec 2004.

None of the brokerages are projecting such poor refining margins. As it is, some of the US and Asian Nov 05 refining margins are among the lowest monthly levels for the past two years. That must start to ring some alarm bells. The reasons for the margin collapse were seen to be the warmer than expected weather (hence lower demand for heating), as well as general soft demand for oil products even as oil prices remained relatively firm. For the record, SPC's prices have tended to be positively correlated with oil prices because the latter have tended to be indicative of demand; as long as demand drove oil prices up, the prices of oil products must be pulled up correspondingly. However, fundamentally, high oil prices were actually a negative for refinery operation because they implied high input costs. If demand sags while oil prices remain high, then one must start to worry. That is how I view the collapse in refinery margins in November.

A couple of other recent news have also highlighted a growing possibility of slowing demand for oil products. Indonesia undertook a highly unpopular withdrawal of subsidies for petrol due to high oil prices, which must ultimately dampen demand considerably. China announced that they would not increase domestic refinery capacity significantly for the next few years, preferring to import oil products instead; compare that to their aggressive global push in upstream exploration and one must conclude that the refinery situation may not be as critical as many might think in the hysterics post-Katrina. Oil trading in the Singapore oil trading centre has also reportedly slowed down significantly; that is another bad sign. All these corroborate the drop in refining margins in November.

I continue to believe that SPC could well outperform the market over the long-term if it plays its cards right in the booming Asean region and capitalises on its government links. However, that is long-term; I view the medium term as more important given my style of investing/trading on (fundamentals) trends. I'm not going to assume execution risks which are immense if we look at the long-term. In terms of business segments, refining contributes the bulk of SPC's profits and it has been shown to be sagging more than expected despite the much-reported supply crunch (which I now believe is on the US side but there are many barriers against arbitrage from Asia, such as high transport costs). Upstream exploration is promising but is expected to contribute only ~10% of SPC's profits in FY06 even when the Ooyong fields start producing. Sentiment might well have peaked. Not a good time to buy, or even hold. My, my opinion has really changed on this counter.

(PS: Don't even think about using P/E to judge the valuation of this one. It is essentially a commodity/basic materials stock, like HG Metal for example. We all know what happened to that one).

(1) International Energy Agency - Monthly Oil Market Report for December




Anonymous Anonymous said...

I find your analysis based on refining margins to be sound.
The upstream contibutions are also accurate.
I am book marking your site for future reading.
Thank you for your quality work.

12/26/2005 7:11 AM  
Anonymous Anonymous said...


I have been following your blogs.
Good work on throwing light on the fundamentals of SPC. DBS, which has SPC in its top 5 large cap in Nov 05, has without explanation removed SPC from its list. The current downtrend in SPC price prompted me to cut loss though I paid with my CPF near peak price. Painful. Worse if my TA analysis comes out wrong.

Keep up the good work.

Wishing you a Happy New Year.

12/26/2005 9:48 AM  
Blogger DanielXX said...

In the medium term, I expect there might be poor 4Q results from SPC and consequent share price correction. But the company remains in strong hands, nonetheless.

12/27/2005 12:15 PM  
Anonymous Anonymous said...

Dear Danielxx

Following from my comment (no 2 here) What do you think of the comment in SI Forum that simple refining is losing money and not complex refining? I am also a subscriber to SI.

You can reply here or in SI. I have not posted any message in SI so far.

Best regards

12/27/2005 4:42 PM  
Blogger DanielXX said...

Hi anonymous,
Hydrocracking is only possible in complex refineries. That is the one I mentioned as negative. For the other simple margins (such as hydroskimming), they are even more negative.

12/27/2005 5:33 PM  
Anonymous Quest said...

hi daniel,

how often do you find yourself talking up stocks in your blogs after you have purchased them and then dressing them down after you have sold them?
i have noticed that recently SPC was mentioned as a "hot stock" in your blog and subsequently now being labeled as a "not hot stock" after you professed to have sold off.

i know that you are doing this out of personal interest and not gaining profits from your content, save for the google ads.

perhaps a warning or disclaimer on your blog that you (subconsciously or not) may be balanced in your opinions.

12/27/2005 7:32 PM  
Blogger DanielXX said...

As I mentioned, the quite unexpected collapse in refining margins caused the change in my views. If you'd read my blog, you would notice that I had mentioned I might be suffering from seller's bias and so readers beware.

The only time I have mentioned SPC as a bull stock was in my site, and there I was talking about its historical development, not recommending the stock.

As for dressing down SPC after selling it, look at it this way: I would have done the most research on stocks in my portfolio, so naturally I would find myself most knowledgeable about these stocks and most at ease in commenting on them. Hence when I sell the stock it takes minimal effort to write about it because I know the subject so well and have the reasons for its "not-so-hot" down pat in my mind. After all, the blog should retain an element of fun for me, not tedious research every other day on stocks that I have never touched or have no interest in. And anyway... I won't have such a deep impact on the buyer-seller market, would I??

That's why I started my blog based on "stocks not to buy". If I recommended "hot stocks to buy" the temptation to push stocks in my portfolio would be too great, and create a conflict of interest (read my latest article on Wallstraits in of now, as you say, I don't benefit directly and financially from my "not-to-buy" picks (save for the google ads), which is a neutral status I'd like to keep.

12/27/2005 9:25 PM  
Anonymous Anonymous said...

Dear Danielxx

One theory put forth often in forums is that banks issuing warrants are pressing down the mothershare as call warrants approach expiry. This theory was mentioned for SPC current weakness. In fact there are several call warrants due first half next year for SPC.

Would you be able to research this subject and post an article to enlighten small investors? Many shares have warrants issued against them. Tempting not to believe that issuing banks will not enter the market to influence their profit/loss on warrants issued all things being equal.

I don't know how true is it that traders are the main players in the warrants market. Sometime earlier this year, an article appeared in Today pushed the view that experience in markets with longer warrant trading history showed that warrant traders as a whole lose while issuers gain. In short the financial institutions including SGX gain at the expense of traders. Every player take the view that I will not lose. The loser is the next fellow. The banker and middleman are happy to foster this belief.


12/28/2005 9:43 AM  
Blogger DanielXX said...

Hi anonymous,
Ha as usual I have something relevant on this subject on one of my other blogsites. Check out this link on the zero-sum game:

and a discussion on buying warrants vs buying shares:

I can't really say whether the issuers gain at the expense of retail investors, yet the temptation must be great for them to push down mother share prices so that they can mop them up for delivery (or cash settlement at lower prices) at warrant expiry. If you also consider that the warrant price itself can drag down the mother share (ie. two-way price feedback) and that the warrant issuer is often the market maker for the warrant, surely the odds are weighed against the small investor?

12/28/2005 9:58 AM  
Anonymous Quest said...

many thanks for clarifying your position.

i love reading your opinion.
i apologise if i had stoked your ire.

12/28/2005 11:28 AM  
Blogger DanielXX said...

Hi quest,
Cheers. No offence meant by you, and no offence taken by me. :-)

A belated Merry Christmas and an advance Happy New Year!

Best rgds,

12/28/2005 11:36 AM  
Anonymous Anonymous said...

I think wow gold and world of warcraft gold

7/09/2009 1:09 PM  

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