- After hitting a June 2014 high of US$115 a barrel, the benchmark Brent blend oil price has fallen to the lowest level in more than five years, at under $70 a barrel.
- Â North American airline earnings will jump 73% from $11 billion in 2014 to $19 billion in 2015, thanks in large part to fuel savings.
- Qantas, Air New Zealand, Sydney Airports and Aurizon are well-placed to benefit.
Very few people predicted a fall in the oil price in 2014: heading into the year, triple-figure oil prices were mostly assumed to be the norm, as sanctions on Iran and unrest in Libya, Iraq and Nigeria kept supply constrained, and the global economy continued its slow recovery.
But fall it has, as demand in China and the Eurozone failed to meet expectations, Libyan production came back on to the market, the US oil and gas resurgence continued apace and the Organisation of Petroleum Exporting Countries (OPEC) opted not to cut supply, as it has done so often in the face of weak prices.
From a June 2014 high of US$115 a barrel, the benchmark Brent blend oil price has fallen to the lowest level in more than five years, at under $70 a barrel.
Low oil prices stimulate the global economy: UBS estimates that for every US$15 drop in the oil price, global economic growth will be boosted by 0.25%. The falling oil price has already delivered a 0.6% boost to economic growth, says UBS.
Although not good for oil producers, many companies are benefiting from the lower prices.
The airline stocks are particular winners in the short term, because their costs are falling with fuel prices, but their fares are not necessarily following. According to Bank of America Merrill Lynch, North American airline earnings will jump 73% from $11 billion in 2014 to $19 billion in 2015, thanks in large part to fuel savings.
Qantas
According to Qantas Airways (QAN), in the past ten years, its fuel bill has more than trebled, from $1.4 billion in 2003/04 to $4.5 billion in 2013/14. Qantas applies surcharges to recover part of this rising input cost – but it is not as quick to lower these surcharges when its fuel costs fall.
Qantas Airways (QAN)
Source: Yahoo!7 Finance, 8 December 2014
Qantas’ share price has surged by 60% since August, when it reported a $2.8 billion net loss for 2013-14 and an underlying loss of $646 million. Chief executive Alan Joyce said at the time that investors could expect an underlying profit in the first half of this financial year, but even he could not have foreseen the recent improvement in the airline’s fuel cost.
Qantas is also benefiting from improved stability in the Australian domestic market – the airline and bitter rival Virgin have ended their bruising capacity war – and yield is improving as a result. Qantas has seen a flurry of earnings and target price upgrades in recent weeks and has six positive recommendations (six from six) in FN Arena’s collation of broker opinions. At $2.10 – the first time Qantas has traded above $2 for more than three years – the stock is trading 11% below its analysts’ consensus target price of $2.33: UBS is the most optimistic, at a target price of $2.80, while Deutsche Bank sees $2.60 as achievable.
Other standouts
Air New Zealand (AIZ) – which has performed much more strongly than Qantas on the stock market over the last five years – has also seen its earnings forecasts for FY15 lifted on the lower fuel prices, and is rated ‘buy’ or ‘outperform’ by three of the four brokers that cover it on the FN Arena collation.
Air New Zealand (AIZ)
Source: Yahoo!7 Finance, 8 December 2014
Sydney Airport (SYD) will also benefit from lower fuel costs for the airlines that use it: aeronautical revenue represents 49% of SYD’s revenue. However the FN Arena broker consensus target price sees SYD as over-valued by 6.3%.
Sydney Airport (SYD)
Source: Yahoo!7 Finance, 8 December 2014
Elsewhere in transport, lower fuel prices should help transportation stocks such as Aurizon (AZJ), Asciano (AIO), Toll Holdings (TOL) and McAleese Group (MCS), but on its own, fuel is not enough. For example, rail group Aurizon’s broking analysts say that the outlook for iron ore and coal tonnage that the company carries is more important. However, the analysts are confident on Aurizon, seeing 14% upside in the consensus price target.
Stevedoring group Asciano, too, is viewed as having very healthy appreciation potential – being 20% short of its analysts’ consensus target price. While improved fuel costs help Asciano, efficiencies, terminal sales and leverage to the economy will be bigger drivers of Asciano’s earnings in the near future.
It’s a similar story with supply chain operator Toll and transport group McAleese – they have big fuel bills for their fleets, and any improvement in that outlay helps the bottom line, but it’s performance in their actual contracts that boosts earnings. FN Arena’s broker consensus sees Toll as 4.6% over-valued at present, while McAleese – not covered in the consensus collation – has lost money for its investors since its 2013 float.
Consumer confidence
Another area where the lower oil prices could benefit the stock market is by flowing into lower petrol prices for Australians – which could boost consumer confidence and economy-wide spending.
Broker CommSec says the national average petrol price is at 18-month lows, which is not just good news for motorists but good news for retailers.
CommSec says filling up the car with petrol is the single biggest weekly purchase for many households: the broker believes, based on the Singapore gasoline price, that Australian petrol prices could come off by a further 10 cents, or 7%. That could provide a healthy boost this Christmas for the stock market’s group of discretionary retail stocks, which we looked at last month.
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