Oil at $200?

AMDG

When Goldman Sachs first predicted oil would reach $100 a barrel before the decade was out, they were laughed at. This was back in 2005, when oil was selling at a paltry $40-$50 per barrel (source: Philequity corner, Philippine Star, May 12, 2008). But now, not only has oil hit the $100 mark, it has surpassed it by almost 40% even way before the year 2010. What’s scarier is this: the latest Goldman Sachs study showed possibly oil reaching $200 per barrel before 2010, double what they had originally forecasted. That frightening figure is no longer drawing laughs of incredulity this time around, although I wish it were so I could laugh nervously along. Nope, this time around the $200 per barrel figure is actually within the estimates of many other respected fund managers, investment banks and industry analysts.

So what’s a small time stock exchange investor like me to do? Sell? Transfer to less inflation-sensitive ventures like drugs or gun-running? Try setting aside a percentage of my portfolio to a “poker fund” or “blackjack investments”? I’d actually try tong-its (people say I’m good at it), but instead of cash, tong-its winners only get bottles of long-neck Tanduay rum – good luck sending my kids to college with that.

It is an understatement to say that oil hitting $200 per barrel won’t bode well for the global economy. That said, l could expect my holdings to go south as well.

In my past entries about AGI, I expressed confidence in this stock despite the subprime crisis and the depreciating Peso, but admitted its considerable vulnerability to high inflation due to its largely consumer client base. With rising oil prices being the grandmother of all inflationary pressures today, my fear of AGI’s susceptibility is once more keeping me up at night.

Another problem of mine regarding rising oil prices and rising inflation would be my real estate stocks, namely: SMDC and, again, AGI (AGI owns 46% of MEG. MEG, in turn, contributes 39% and 65% of AGI’s total revenue and net income, respectively. MEG is also the is fastest growing revenue source for AGI). Rising oil prices is a double whammy if you’re in real estate: your production cost goes up significantly (bulldozers, trucks, cranes, cement mixers and what not don’t run on magic or nuclear fuel; everything used for construction – steel bars, cement, aggregates, nails – goes up too because of more expensive freight) while the capacity of your potential markets to buy goes down significantly as well. Not to mention high oil and inflation depresses the Stock Exchange, the other Achilles’ Heel of SMDC.

COAT is one of those stocks which is not totally affected by rising oil prices. Of course, their production costs would likely go up (I’m sure they’ll have to haul stuff around in trucks or something). Unlike real estate, though, rising oil prices will make the products of COAT more attractive to buyers, especially their oleochemical-derived biodiesel. Add to rising oil prices the emerging awareness against air pollution and global warming, and COAT’s biodiesel becomes more likeable on a less consumerist and more civic and environmental level. One need only to look at green companies in the U.S. or China whose stocks have doubled or tripled in the past two years, and the potential of COAT becomes evident.

However, COAT – in my humble opinion – seems to be a company that’s too conservative for its own good. Current ratio is above 9, and debt comprises a minuscule 7.4% of equity. While this state of financial health is amazing for conservatives (I really liked it too the first time I saw it), I believe COAT may not be doing enough to prepare for the future and take advantage of the opportunity at its doorstep. Case in point: capex for COAT for the first quarter of 2008? P20M – microscopic for a company with P3.1B in equity, almost P3.4B in total assets, P480M in net income last year and possibly the largest market share in an industry set to double (at the very least) in size come February of 2009 when the mandatory biofuel blend for diesel as per the Biofuels Act becomes 2%.

Another stock that I’ve been looking at lately that might not be as vulnerable to rising oil prices is AP. With 78% of AP’s revenues coming from power distribution, and with its power plants drawing electricity from coal, geothermal and hydropower, the impact of rising oil prices is minimized (although rising oil prices will make the construction of future plants more expensive). Moreover, with AP’s thrust to draw more electricity from clean, renewable and, most importantly, affordable sources, their product might become a more attractive alternative to oil. (Since oil is a substance whose end byproduct is energy, this is what it essentially is, i.e., energy is what you pay for when you buy oil. As such, AP’s product – energy drawn from coal, hydro or geothermal sources – has the capacity to compete directly with oil. This will not happen overnight, of course, but think long term: electric cars being fueled by electricity from hydroelectric or geothermal power plants. Who knows? Maybe wind farms and solar power plants may even add to that mix.)

However, I feel the time to buy AP may have come and gone. In the third quarter of last year, AP reached a low of P3.90, just a little more than P0.20 shy of its 2007 yearend book value. Now, at P5.50-P5.60, I feel AP may be too expensive for the meantime.