Saturday, 16 July 2016

Halftime Review of my Portfolio (2016)

My investing performance for 2016 has been poor so far. Due to my large exposure to the O&G sector though Penguin Holdings, my portfolio has taken a beating. While total portfolio value has increased slightly from last year's, it has been mainly due to my constant injection of fresh capital (averages about $3,000 monthly). 

Winning the battlefront/Losing the War

Spook by Yongnam's under subscription of rights, I have quickly sold off my recently converted shares at 0.215. My gut feeling is that Yongnam may be priced even more attractively in the future and hence I have decided to lay off for now. In addition, through active monitoring of the tanker industry, I have decided to divest a partial stake in FSL Trust for a profit. While I have indeed made numerous small gains from Yongnam/ Silverlake/FSL/Accordia, the losses on Penguin and China Fishery have balanced the scale ( Have decided to write off China Fishery).

Tanker Industry

In my opinion, a bubble is forming in the tanker industry. Tanker rates in the MR and Aframax classes has fallen from their highs due to a rising supply of tankers and new shipbuilding orders. In Oct 15, FSL purchased "FSL Osaka" for $21.8 mil, with a then projected conservative rate of $16,500 per day, which was rather conservative when MR rates in the region of $17,000 then. Fast forward to today, MR rates are going at $15,500 per day. Given the fall in Aframax and MR rates, segments which FSL trust is in, I think it will be wise to take some money off the investment.

With many tankers berthing at sea as oil storage, one can't help but wonder how low will oil tankers rates be; should this floating storage be relived of their cargo and return to the spot tanker market.

The Economy

Human nature never fails to disappoint - when a market is improving, the end result is massive investment and orders, creating a scenario where the increase in supply outstrips that of demand growth. This causes a massive buildup of inventory/idle capacity. 

We have witnessed this in the oil industry where an environment of high oil price resulted in massive and expensive oil drilling projects. An oversupply of oil is now driving prices down and rendering these projects unprofitable. In the US, this is causing many energy companies to default on their debts. The global shipping industry is another, where years of boom building has caused the Baltic index to fall to lows. In Singapore, we are starting to experience the oil downturn from mainly the effects of CAPEX cuts by oil majors. Order books are drying and those who still have orders are doing it at low single margins.

My Thoughts

It is likely oil will remain below $60 for at least 2 more years. While demand for oil is growing annually, too much inventory is waiting on land and on sea for the increase in oil prices. It is going to take years for these excess supply to work through the system, thus putting a cap on oil's rise. This means for many oil demand derived industries such as offshore support vessel/crewboats/service rigs, there won't be an upturn of activity in the near term. 

With so many Singapore companies exposed to the offshore support industry, it is inevitable our local economy will be badly affected. My prediction is that the worse is yet to come for our country. Being a value investor whose only expertise is in the SGX, I am taking more money off the table and waiting to see how things go. My anticipation is that many O&G related companies will be sold down to even more distressed levels; hence this is why I have even sold off some stake in my largest stock allocation, Penguin Holdings.

Companies with great balance sheets (think Tiong Woon and Penguin) will find it trying to navigate through this oil crisis. In addition, the downturn will affect other industries including property and retail. This is my second order thinking. The probable bright spot is in the public infrastructure sector where the government will be pumping more money to support infrastructure and as a tool of expansionary fiscal policy.

While I have made such bold predictions through my crystal ball; the present enemy is myself. With close to 47% now in cash and more money returning in the form of P2P repayments, itchy hands will itch; resulting in foolish bets. After all, idle hands are the devil's workshop.

In that sense, I look forward to the release of Pokemon Go to stop the itch.  


2 comments:

  1. Agreed with huge cash positions, one tends to spend on wrong counter and size more recklessly. I am expecting more down turn on oil and gas related too as companies try to find niche area of reasonable margin within the industry resulting more competition within the broader sector. Huge cash in the system may take longer than expected due to financial engineering.

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