Tuesday, October 27, 2015

Scorpio Tankers - Undervalued Gem in an Over-Supplied Oil Market

The business model of almost every oil related business has been tested as the dollar price per barrel has fallen from over $100 in June of 2014 to the present $45 price in October 2015.  As stock prices of energy sector firms have plummeted, many investors are currently playing a nervous game of trying to call the bottom in the hope of catching upside gains in the event the tide turns quickly.

Loading up for an eventual sector rebound may require extreme patience given the level of over-supply in the production pipeline worldwide at the present moment.  The tide will turn, but in the meantime, most investors still want to make money.  And, like most industry sectors, just because a bear market has set in for the near-term, it does not mean that opportunities in the oil market for upside gains and cash returns are not possible – just that they may be a little harder to find.

The current opportunity in the over-supplied oil sector is simple – look for marine based petroleum transport companies like Scorpio Tankers (STNG) which in my opinion is substantially undervalued given the current market dynamics.  Why?

Export driven oil counties like Saudi Arabia, Russian, etc. have flooded the market with crude over the past year and the excess supply has to go somewhere.  Presently the somewhere is primarily China and other Asian emerging market, driven by currency pegs held high relative to the strong dollar and a oil futures curve contango with a favorable low dollar front end price level.  The ancillary beneficiaries of this situation are companies like Scorpio Tankers which specializes in the transportation of oil via tanker ships worldwide.  And, as the current flow of oil into storage becomes saturated and the North American shale oil business model implodes as it is presently doing, the benefits will continue to accrue to shippers like Scorpio because the U.S. will return to greater dependency on imported oil and related petroleum products.

Monday, October 12, 2015

Has Oil Finally Found a Bottom?

Over the past 5 trading days post the Friday morning October 2nd 8:30 jobs report, investors with exposure to the energy sector have been treated to a major rally.  As seen in the graph below, the Energy Select Sector SPDR ETF (XLE) has risen 14.5% from $60.62 at the open on Friday to the closing price of $69.41 on Thursday. 

Compared to the S&P 500 (SPX) (SPY) aggregate index, which has posted a 4.5% gain over the same period, the out performance of the energy sector is substantial, and worth taking a closer look at to understand what is driving the significant divergence in the returns before diving into just any energy stock at this point in time. 

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