Bull stock: SPC 1 comments

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The hot story of 2004 was China, and the hot story of 2005 is undoubtedly oil. Oil prices making new highs has been the talk of town throughout this year, but Hurricane Katrina has brought into focus the glaring global tightness of refining capacity. However, this was eminently clear as early as 2004, which had resulted in SPC, with its 50% stake in Singapore Refining Company its crown jewel, surging in share price from less than $1.50 in early 2004 to $5.50 now. Coupled with the high dividends, it would have rewarded an eagle-eyed investor with a four-bagger over less than two years!

Fast rewind to late 2001. The stock had sunk to a low of $0.60, partly a result of a downturn in sentiment following September 11 but more fundamentally its business prospects were viewed pessimistically by the investment community. It had been struggling with razor-thin margins and stagnating revenues (albeit S$2B worth) in its mid- and downstream oil business in the last few years, and indeed had made losses in two of the last three years, while technology stocks were the rage. The talk was that there had been so much global investment in oil refineries and supporting infrastructure in preceding years that now there was an over-supply and thus a long-term downward pressure on refining margins. With such negative vibes, it was no wonder that the stock became thinly traded by 2002.

Through the bearish environment of the first few years of the new millenium, SPC concentrated on building its upstream and downstream business, through acquisition of the Kakap PSC in Indonesia and pipeline deals to bring in natural gas from the same country. Its links to Keppel (and the Singapore government) probably helped facilitate such deals; effectively SPC was the national oil company and would be the de facto oil play should the commodity become hot again (as it has never failed to routinely) in the future. The key deal, however, was SPC's purchase of BP's stake in Singapore Refining Company and its retail stations in 2003, raising its stake from 33% to 50%. Revenue and profit consolidation was now possible and it had raised its refining revenue and profit base in one fell stroke, by about 50% (16% increase from 33%). With BP's islandwide retail stations, SPC had also become the third largest petrol retailer in Singapore.

The commodities craze in 2004 soon spread to oil and refining margins surged to as high as US$10 per barrel in late 2004. By then, SPC had already surged to the S$3-4 range, as investors started to wise up to its strength in refining and distribution, and the wild card in upstream production. Normally, a rise in crude oil prices is only a mild positive to refiners, as it signals strong demand (a positive) but also implies high input prices. However, in 2004 sweet light crude was scarce and hence expensive, while the Middle East were only able to increase heavy sour supplies; this meant that complex refiners with an ability to process the latter could charge premium refining rates. SPC was one of them. Net profits jumped an astonishing fourfold from S$60M in 2003 to S$250M in 2004 (also partly due to the increased ownership of SRC).

The SPC story continues into 2005 and beyond. The currently acknowledged shortage of refining capacity is ironic when one recalls that just several years back people were saying there was an oversupply. It just illustrates the law of reversion to the mean (and then some) yet again. Meanwhile, the frenzy over oil continues as the winter season sets in and demand (and refining margins) is expected to peak. Is this sustainable? Perhaps the growth for SPC in the future lies in its upstream business and its ability to secure new production contracts in South-east Asia, which increasingly looks like a hotbed of oil exploration activity in the future, as countries like Indonesia open up.

References:
(1) GK Goh's report on refining 5 Sep 05