RETAIL INVESTORS: How weak Oil Price may affect your portfolio

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Thursday, April 28, 2016 3.38 PM / TheAnalyst 

 

The collapse in oil prices witnessed in 2015 adversely affected the fundamentals of some specific sectors. Oil companies were the worst hit, particularly the key upstream companies and financial partners- the banks are adding more bad assets from oil and energy sectors as low oil prices reduced their capability to repay loans.  As a retail investor, it is important to know and be guided towards how happenings in the oil market could affect your portfolio

There is no established fact that reveals strong correlation between movement in prices in Oil Market and Stock market. This technically implies that we cannot use performance in oil market to predict the price reaction in stock market as we have different combinations of factors that drive stock price movement, which are basically future earnings, earnings reports, investors’ sentiments, risk tolerance and the quality & quantity of fundamentals.  

This is against the general belief that rally in oil market should translate to bullish run in the stock market. However, this is does not mean that oil price could not impact specific sectors much more than other key sectors. For instance, Transport and logistics sectors may have direct impact from fluctuations in oil markets. 

The collapse in oil prices witnessed in 2015 adversely affected the fundamentals of some specific sectors. As a retail investor, it is important to know and be guided towards quoted firms that are directly affected by the happenings in the oil market. 

In this regard, we shall highlight and review key sectors that are possibly taking hits from the price fluctuations in oil market. This is necessary because any change in dynamics of the oil market has direct ripple effect on these third parties companies/sectors. 

Ordinarily, low oil price is expected to bring fortune to industrial, manufacturing (i.e. the Consumer Goods Stocks), transport and logistics companies as this has strong tendency to lower the operating cost significantly in terms of fuel consumption. But this is not so in Nigeria due to different mix of ungodly dynamics. 

On the other hand, the Oil Sector is usually the worst hit, particularly the upstream companies that are involved in exploration and mining, and trading at regulated market price irrespective of high production cost.  

This is to say Oando and SEPLAT, apart from their underlining weak/strong fundamentals, would go through hard times if oil prices decline. What this means is that the ability of these companies to grow bottom-lines and margins can be significantly hampered.  

However, a rebound in the Oil Price spells fortune to these companies but any further prolonged low-price trend at a growing production cost may attract bigger problems to these companies going forward. We may sumbit that the rebound in oil market is on sight as world bank recently adjusted its price benchmark northward. 

On the other hand, we do not expect the downstream companies to record so much hit if oil prices decline, and they are more likely to recover faster than upstream provided the underlining fundamentals remain healthy, as these companies deal in buying of crude and selling refined oil products. In this instance, FO, Total, Mobil, CONOIL and ETERNA are not expected to suffer much from decline in Oil Prices; provided the underlining fundamentals remain sound and they are not deeply involved in upstream operations. 

Here is performance of oil and Gas so far in the year as at April 25, 2016 


Furthermore, the Banking Sector is another segment of the economy with the potential to suffer most from decline in oil prices. The fall in oil price in 2015 had weakened so many oil companies in meeting their obligations to financial partners, majorly the banks, which has led to growing bad loans/risk assets in the banking sub-sector. This had significantly contributed to growth in NPL and impairment charges in the banking sector.

Here is available Non-performing Ratios so far 

The significant exposure of banks to Oil/energy sector had created holes in the balance sheets of these banks. As retail investors that are trading against so many odds, this is the sector you are expected to be more cautious about as large numbers of Nigerian banks are carrying huge bad debts in their books.  

The significant surge in non-performing loans and impairment charges in the Q4'15 reports confirmed these assertions. The banks with less exposure to oil sector could be considered. In our opinion, we encourage investors towards banking stocks with conservative exposure to Oil and Energy sector. The banking stocks are experiencing bearish run since January 2016. Below is how banking stocks have fared in the year 2016. 


For retail investors, a balanced portfolio reshuffling is advised to prevent an adverse effect of declining oil prices on your investments.  

 

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