SIF Folio: Should we fear Saudi oil shortfall? Plus 4 new international stocks

The latest addition to my UK SIF folio was Kurdistan-focused oil producer Gulf Keystone Petroleum. As I own at least one stock with exposure to the wider Middle East region, should I be worried about the oil price spike which has followed Saturday’s drone attacks on the giant Abqaiq oil processing facility in Saudi Arabia?

There are three aspects to this issue that seem relevant to investors.

Oil Price: Despite the oil price spiking 12% higher on Monday (pm), the price of Brent Crude is still about 13% lower than it was one year ago. 

In my view, the last-seen price of $67 per barrel is unlikely to be disruptive for either end users or producers. I don’t see any reason to worry about the oil price at this time.

Impact on global supply: At first glance, the impact of this disruption appears to be significant. Saudia Arabia’s oil production is said to have halved, falling from c.10m barrels per day to around 5m. That’s equivalent to a loss of about 5% of global supply.

You might think this would be likely to lead to an immediate tightening of the global oil market, with the potential for supply disruption. However, three factors appear to mitigate against this.

Firstly, some of the Saudi shutdown is said to be precautionary and may be back online relatively soon.

Secondly, stock levels are high, globally. Major markets such as China and the US have sizeable oil reserves they can release to support supply, if needed. Saudi Arabia says that it will use its oil inventories to maintain customer supplies.

Finally, before last weekend’s events, the market was generally seen as well supplied. Less than a week ago, the US International Energy Agency (IEA) was forecasting (FT paywall) a surplus of 1.4m barrels a day next year, if Opec production remained stable.

Based on what we know at this time, my view is that the impact on global supply will be manageable.

Geopolitical risk: I believe this is where the real risks lie. Will conflicts in this region escalate? 

Subscriber rhomboid1 left a potentially prophetic comment on my piece last week, highlighting the geopolitical risks of investing in this region. My response was essentially that although this region has been famously unstable, oil exports have tended to prevail. 

For now, Kurdistan appears to be a safe distance away from the Iran-Saudi proxy conflict. We’ll have to see if this remains true.

Moving on, this seems like a good time to take a look at the performance of my International SIF portfolio and check my international screen for potential additions.

Early signs of a bounce?

Things are still pretty bad. My international portfolio is worth a virtual £96k at the time of writing, 20% below its initial (Nov 2017) value of £120k.

However, the folio (blue line below) has at least mirrored the market recovery (grey line) of recent weeks. Perhaps there’s some hope of a rebound:

In this spirit of optimism, I’ve been shopping for new stocks to add to this virtual portfolio. Here are the companies I’ve chosen from my screen results, with due regard to diversification and my target geographical weightings:

• Delta Air Lines Inc (NYQ:DAL) – the major US airline

• Lindab International AB (STO:LIAB) – a Swedish group which sells systems to support the construction of airtight, energy-efficient buildings.

• Uniper SE (ETR:UN01) – a German utility stock

• Hyundai Mobis Co (KRZ:12330) – a maker of car parts and complete modules, primarily for Kia and Hyundai.

Delta Air Lines Inc (NYQ:DAL)

This US scheduled airline is one of the larger carriers out there. Although I’m not a regular flyer, I have flown Delta a few times as a result of its code-sharing agreements with Virgin Atlantic. Of the two, Delta was a clear winner for me – I found the onboard service, food and the aircraft itself were all better.

As an investment, airlines present a mixed picture at the moment. Here in Europe, airline stocks are pretty depressed as overcapacity looms. But the US market has been holding up better. Delta has also benefited as it doesn’t fly the grounded Boeing 737 MAX aircraft, unlike rivals American Airlines and Southwest Airlines.

These benefits are reflected in the relative performance of airline share prices over the last year. Here’s a chart showing Delta versus British Airways owner IAG:

(If you can’t read the print, Delta is up by 20% over the last two years, IAG is down 23%.)

Delta looks fairly attractive from an investment perspective too, assuming you have a neutral or positive outlook on the US economy. According to Stocko stats, the DAL shares trade on about eight times forecast earnings, with a yield of 2.6%. Net debt appears modest at about $8bn, although I’ve not checked if this figure is adjusted to also include any lease liabilities.

Profitability has been quite decent in recent years, with the TTM figures showing a reversal of the declining trend seen in recent years:

Stockopedia likes Delta stock too, styling it as a Super Stock with a StockRank of 96.

I’ve added Delta Air Lines to the International SIF.

Lindab International AB (STO:LIAB)

This Swedish group makes products and systems for airtight and energy-efficient buildings. These include heating and ventilation systems, cladding, steel frames and roof drainage.

I’d certainly expect this to be a growing sector, and Lindab’s growth in recent years supports this view. According to the Stockopedia stats, sales have risen by an average of 7.4% per year since 2013. Earnings have risen by 11% per year over the same period.

It’s a decent rate of growth, in my view, and although this firm’s return on capital of c.10% isn’t amazing, I don’t see too much to dislike here, except for the risk of a cyclical downturn in demand.

I’ve added Lindab International to the International SIF. But please remember that as always with my international picks, I’ve only given the figures a cursory glance. This is a virtual, experimental portfolio. I wouldn’t recommend buying without a more in-depth understanding. 

Uniper SE (ETR:UN01)

UK investors in utility stocks have had a torrid time over the last couple of years. But this isn’t necessarily mirrored elsewhere. German power generator Uniper has delivered some pretty attractive gains for its shareholders since spinning out of E.ON in 2016.

As you can see, the StockRanks have so far correctly identified the right times to be holding this stock:

E.ON dumped its fossil fuel assets into Uniper, which owns a collection of coal and gas power stations, along with a sprinkling of hydroelectric, oil and nuclear plants. It has significant operations in the UK and Russia, as well as Germany.

The valuation looks fairly typical for a utility, with a relatively high P/E ratio that’s supported by a generous dividend payout ratio.

Both earnings and the dividend are expected to rise strongly over the next year:

These figures put the stock on a rolling forecast P/E of 17, with a rolling forecast yield of 4.4%. I’ve added Uniper to the International SIF.

Hyundai Mobis (KRX:12330)

This Korean firm makes parts and subsystems for the Kia and Hyundai automotive businesses. It’s one of the world’s largest automotive parts suppliers. It’s a big business, with a market cap of £16bn.

Although new car sales appear to be in decline in a number of markets, recent results suggest the firm’s profits are recovering after collapsing in 2017. Again, this is something I’d want to investigate in more detail if I was buying with real money. For now, I’m happy to accept the Stocko figures at face value:

As you’d expect, the valuation is fairly modest. The stock trades at a 30% discount to book value and on less than 10 times forecast earnings. However, Hyundai Mobis appears to have a sizeable net cash balance and improving performance. Analysts have also turned positive recently:

I’ve added Hyundai Mobis to my international portfolio.

As always, I’d love to hear your views on the oil market or my international stocks. 

I’ll be back next week, hopefully with a new UK stock for my main portfolio.

Disclosure: Roland owns shares of Gulf Keystone Petroleum.

Stockopedia