Betting On Fallen

Latest news – Shares of Sapura Energy tumbled more than 9% in early Thursday trade following report that Tan Sri Mokhzani Mahathir is disposing off his entire stake in oil and gas services company. This is the second time Mokhzani is offloading its stake in an oil and gas firm. In 2015, Mokhzani’s private vehicle, Khasera Baru Sdn Bhd sold off a block of 190.3 million shares in SapuraKencana Petroleum Bhd for close to RM820mil in total.

Industry players said Mokhzani’s exit did not come as a surprise. They added that Mokhzani believed the oil and gas industry was a global issue and prefers to redeploy his resources in other investments. 

Mokhzani through Khasera Baru has a 10.10% stake in Sapura Energy. According to a term sheet, Mokhzani is looking to sell up to RM905.1mil of Sapura Energy shares. The bookbuilding range for the offer represents 605 million Sapura Energy shares was between RM1.42 and RM1.49 a share.

The price range represents an 8% to 12.3% discount to Sapura Energy’s closing price of RM1.62 on Wednesday ahead of the bookbuilding launch. Khasera Baru will not own any Sapura Energy shares after the sale. 
Read more at http://www.thestar.com.my/business/business-news/2017/11/02/sapura-energy-tumbles-9pc-in-early-trade/#zLhAuhfLVUKh4pbF.99

My 2-cent thoughts – I am not surprised that Tan Sri Mokhzani will make an exit due to current political friction. Without zooming into the company fundamentals, is Sapura Energy currently in an oversold position?

Sapura Energy has always been a close proxy to the Brent (USD) (as shown in the graph below – since 1 Jan 2014):

SAPE vs Brent _2 Nov 2017.png

A simple regression analysis shows that there is a strong statistical relationship between SAPE and Brent (USD). The current share price of SAPE of RM1.48 is relatively lower than forecast share price of RM2.35 and is even lower than the 95% confidence interval range of RM1.65 and RM3.04.

Forecast SAPE.png

Scenario Analysis

Based on the regression relationship, the following is a simple sensitivity analysis of the SAPE share price based on Brent (USD):

Sensivity Analysis.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Waiting For Brent To Tank

Latest news: Oil is trading in bear market territory, with prices falling to their lowest level this year as rising supplies threaten to derail an effort by some of the world’s biggest producers to bring an end to a three-year glut. Renewed concerns about growing production from within the Opec cartel and a reinvigorated US shale industry took global crude benchmarks on Tuesday to the lowest level since mid-November with Brent crude sinking to $46 a barrel. Prices at one point during the session were down more than 20 per cent from levels at the start of 2017. A decline of more than 20 per cent from the most recent high is typically considered a bear market. Crude has now erased all its gains since late last year, when Opec and other producer countries, including Russia, agreed to cut output by 1.8m barrels a day for the first six months of 2017. A decision in May to extend the original six-month deal for a further nine months has not helped lift sentiment as a growing chorus of traders and analysts question the effectiveness of the supply curbs.

Price of Brent crude on Tuesday

Brent crude, the international benchmark, fell 89 cents, or almost 2 per cent, to settle at $46.02 a barrel, the weakest level since November 15. West Texas Intermediate, the US marker, dropped by 97 cents to a nine-month low of $43.23 a barrel, down by more than 20 per cent from a February peak.

Brent Graph.png

Two questions – (1) where is the bottom for brent? (2) what would you do when Brent tanks to the bottom? Continue reading “Waiting For Brent To Tank”

Deciphering A Put Warrant

The structured put warrant for the underlying Sapurakencana Petroleum, SKPetro-HD jumped 20.0% today from RM0.05 to RM0.06, in tandem with the fall in the underlying price. What will be a theoretical fair range of pricing for SKPetro-HD?

Continue reading “Deciphering A Put Warrant”

Downtrend Persists?

Latest News – This cut in production is a first since 2008 and is sentiment positive. Brent oil has rallied by some 10.9% and now trades at the US$51.64 level. Further details will be worked out at the next Opec meet on Nov 30.

Hong Leong Investment Bank Research analyst Lim Sin Kiat believes that this development is not sufficient to improve local oil and gas (O&G) services players’ earnings, as the anticipated oil price improvement is not expected to lift oil producers’ capital expenditure (capex) significantly, at least in the medium term.

“The only company which would be directly impacted by the oil price movement in our coverage would be SapuraKencana Petroleum Bhd. According to our sensitivity analysis, an incremental US$10 per barrel improvement in Brent oil prices would bring about a 42% increase in our current earnings forecast,” he said.

Read More

Where is SapuraKencana (SKPetro) heading?

The announcement of planned production cut by OPEC had led to positive movement in the share price of SKPetro.

Current GP SKPetro.png

Nevertheless, since 2014, SKPetro appears to be in a consistent downward channel, with certain false breaks. Its 200D-moving average appears to be forming strong resistance against any price upward movement.

5218.MY.jpeg

For SKPetro to sustain its upward trend, it has to make significant break above its 200D-moving average resistance line. Currently, it has not made significant breaks above the resistance line.

5218.MY (zoomed).jpeg

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.

Light At The End Of The Tunnel?

More volatility ahead for O&G companies

Malaysia’s biggest O&G player, Sapurakencana Petroleum (“SKPetro”) recently reported its 2nd quarter result (for financial period ending 31 July 2016) on 28 September 2016. The results indicate that there will be more volatility in operating results of operating companies:

We saw a significant drop in revenue. Nevertheless, the operating income was boosted by  a non-recurring operating income recorded for the latest quarter:

fs_1

The non-recurring operating income was due to payment received from Petronas for the cessation of its RSC contract, as explained below:

fs_2

Prospects remain challenging. However, Management expect the Company to be able to navigate the year satisfactorily.fs_3

Technically speaking, SKPetro appears to be on a bearish mode:

  • The stock does not appear to be able to break its downtrend mode

skpetro28092016_1skpetro28092016_2

  • Other technical indicators e.g RSI and MACD seem to support an overall bearish tone

skpetro28092016_3

  • To be able to successfully break the downtrend, the share price and / or its shorter tenure MAs should breach the 200D-MA line, with a strong volume support.

skpetro28092016_4

Nevertheless, we may see some support at RM1.28 for potential rebound.

Recent weakness may have been attributable to the on-going disposals by major institutional investor such as EPF:

SKPetro_Disposals.png

In terms of analysts’ target price, it is quite wide (ranging from RM1.16 to RM1.71, with Hold / Sell recommendations):

PriceTarget_SKPetro.png

What is very clear at this juncture is that we are yet to see the light at the end of tunnel for O&G companies. We should brace for more volatility ahead.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.

Be Wary, Be Cautious, Be Vigilant

More bad news in the Oil & Gas (O&G) sector?

We have seen so many worrying news relating to the O&G sector flowing out of Singapore.

http://www.straitstimes.com/business/companies-markets/singapore-seen-at-risk-of-cascading-oil-service-bond-defaults

Will we see more credit defaults in the O&G sector? In Singapore or other countries?

Although the Malaysian O&G sector appears resilient (probably due to presence of Malaysia’s national oil company, Petronas), there was an update announcement relating to the maturing debt of Perisai Petroleum:

Perisai.png

For Perisai, we can only hope that the outcome of the discussion between Management and notes holders will be favourable to the company.

What about bigger oil major company in Malaysia such as Sapurakencana Petroleum? It has since rallied fair a bit in tandem with the recent rebound in the oil price:

Skpetro TS.png

Is the current rally in crude oil sustainable?

Analysts at Citi also warned of the risks of a price rally based largely on potential future talks on freezing crude output levels given that similar meetings earlier this year failed to produce any such agreement.

“OPEC cooperation hopes should be treated with caution, as this is shaky ground to base a bull rally on,” the bank said.

http://www.cnbc.com/2016/08/17/brent-crude-oil-prices-dip-on-prospect-of-record-saudi-output.html

How does movement in SKPetro compare to movement in brent crude oil since 2012?

Since 2012, SKPetro’s share price appears to have advanced ahead of movement in the brent crude oil. The divergence in movement appears to be relatively higher in the period of between year 2013 and 2014. Nevertheless, we are seeing a declining divergence of which SKPetro has fallen to 71% of its initial base (2012) whilst brent crude is 45% of its initial base (2012).

SKPetro vs Crude.png

It is important to closely monitor the latest reported results of O&G companies including SKPetro. Everyone must continuously stay vigilant at all times. Apply commonsense and do not follow the bandwagon blindly. Rallies without underlying fundamentals will not last.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

Buying Insurance Against Fallout In The O&G Sector

We have recently seen continuous flow of bad news from the Oil & Gas sector in Singapore:

Further, crude oil may be falling again. http://www.usatoday.com/story/money/markets/2016/08/03/crude-oil-prices-may-back-skids/87454152/

It is time to maintain cautious stance toward the O&G sector and to consider hedging (i.e “buying insurance”) against further possible fallout in the Malaysian O&G sector. One such instrument that may be considered for the purpose of hedging is SKPETRO-HD (5218HD), a structured put warrant on Sapurakencana Petroleum (a Malaysian listed O&G company). Extracted from Malaysia Warrants the following are key features of this structured warrant:

 

MQ Terms.png

Since mid 2015, SKPetro’s share price has been on a downtrend:

SKpetroGP.png

Target analysts’ price for SKPetro ranges from as low as RM1.20 to RM1.90.

SKpetro target.png

A higher volatility of the underlying as well as a lower share price of underlying will increase the share price of the structured put warrant, SKPetro-HD. In a nutshell, one should not consider buying a warrant when volatility is high (i.e should buy before volatility rises).

As shown below, the YTD historical volatility (10D,30D,50D and 100D) have recently trended lower, below that of average historical volatility of approximately 46%.

YTD HisVol.png

From a different angle, the following graph shows the proportion change (YTD) for the historical volatility of SKPetro has fallen below 1.0 (since 1 Jan 2016), thereby showing a lower recent volatility.

YTD HisVol Prop.png

As for the implied volatility of SKPetro-HD, the current implied volatility of 70% approximates the average implied volatility (since the first issuance date of SKPetro-HD) which is approximately 70%.

ImpVol.png

With the implied volatility of SKPetro-HD approximating its historical average and historical volatility of the underlying is relatively lower than its average, this may present potential opportunity to consider this instrument.

Assuming the following parameters:

  1. Implied volatility of 70% (based on average implied volatility)
  2. Underlying share price of RM1.20 (as per the lowest target price by analysts)
  3. Assuming underlying touches RM1.20 as of 30 September 2016

The possible theoretical price range of SKPetro-HD is computed based on the warrant calculator from Malaysia Warrants

Calc.png

At current ask price of SKPetro-HD of RM0.10 per warrant, we may be able to achieve a 15% return on investment (should the warrant price increase to RM0.115).

Final Words: It is important to note that this is a simple desktop analysis. Further bad news in the O&G sector will drive the volatility of the underlying, which may translate into higher implied volatility for the SKPetro-HD. Nevertheless, based on past trading volume of SKPetro-HD, it has a very low trading volume, thereby questioning the appropriate fair value to be accorded for this instrument.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.