Monday, December 29, 2014

Oil Prices

I come from an Oil background and the recent drop in oil prices globally has indeed affected quite a lot of players.

Brent and WTI and dropped by almost half in the last 6 months. Personally I feel that this is overdone, as fundamentally there is not THAT much of change from 6 months ago but instead a huge change in sentiments.

To start off, maybe I should explain what are these futures about. Brent and WTI and both forward contracts of oil that are deliverable at a certain place and point in time. They are typically monthly contracts, for eg. Jan 15 Brent, Mar 15 WTI etc. When people talk about oil prices, they typically refer to the nearest month's contract price.

As for bench marks, Brent is typically used as a global bench march, meaning all other oil in the rest of the world uses this as a fundamental price and start to build on it to arrive at a price where they will be consumed. For example, in Asia, crude prices are traded using a bench mark called 'Dubai', which is benchmarked against Brent. Essentially, when you are trying to value a particular crude at a certain point in time, you use the most liquid quote (Brent) and and add/subtract known differentials to arrive at the price of the actual product that you are looking to buy/sell.

WTI is rarely used as a bench mark outside of USA because the price is greatly affected by the pipelines in USA and also because WTI cannot be exported out of America. It is somewhat correlated to the crude prices outside USA, but because brent is a better correlation, WTI is seldom used.

So now back to the actual topic, these contacts are for oil prices somewhere in the future. Hence prices are a reflection of market sentiments and not actual supply/demand. The recent drop in prices have a thousand and one explanations, the favorite being the OPEC countries not wanting to budge on reducing their output so as to maintain their market share. If you think about it, I don't think such a move will justify a drop of 50% in oil prices. And if you notice how all those market reports on predicting oil prices, the analysts just keep on changing their target as the prices change. All these reports are always a look back on what has happend! and are not giving a netural and forward looking view.

Anyway, at this price level (Brent at $60), they is probably still room for the oil prices to drop. However, similar to the stock market, it is very hard to pick the bottom. I would say that it make senses to start accumulating. You can do so by buying further out oil futures (like brent Dec 15) or like United States Oil ETF in the US. One good pick I think people should look out for are oil related companies who have been hit as hard as the underlying oil price itself. I might be wrong, but I feel that oil rig builders/maintenance, will still be in business, albeit slower. If you have the patience, I think it is a good time to accumulate these companies for the dividend and capital growth.

Sunday, December 21, 2014


I was recently looking to buy into an F&B franchise. From what I have learned so far, this is the rough break down of a typical successful outlet.

Rent: 20%
Manpower: 20%
Food: 30%
15%: Depriciation + Utilites.
Profits: 15%

The break down above really varies from the kind of F&B that you are doing.

If we start looking at an F&B objectively and try to optimise it, there are a lot of ways where the F&B business can be made much more competitive than others.

1. Rent
Essentially when you run an F&B, it is a brick and motar business. You are trying to captilise as much profits per square feet of rent that you are paying. If you are able to generate the same kind profits by doing other kind of businesses, there is really not much point in trying an F&B business. Another way to look at it is, finding a location where you are able to generate similar kind of revenue, but at a much cheaper rent. Much easier said than done. But if you can find such a location, it gives you a chance to 'capitalise' on this cheap rent, regardless if you are doing an F&B business, retail etc.

2. Manpower
How do you optimise the business that is naturally capital intensive? Either you automate more of the process, or pay your staff lesser. Automation can be done to a certain extent, like automatic ordering system etc. As for labour costs, it is know a fact that foreginers are much cheaper than locals and are generally more willing to do such labour. I was previously thinking, what if we can staff more foreigner talents into such industry, but yet still meet the local to foreigner ratio required by the goverment? I have thought of some ways about this before. What if a stall only hires 1 local manager and the rest of the 5 foreigner staff are sub contracted from an employment agency? Such agencies can be used as a holding company that have access to lots of Singaporean workers. Hence there is really no violation of the law.

3. Food
I don't have much comment about this because essentially I think it entails going further upstream to the source and buying more in bulk.

4. Deprication / utilities
Based purely on number, a smaller deprecation means greater profits. Essentially the lower the onset of start up cost, the smaller depreciation. If you can find an outlet that is fully renovated but is distressed, due to various reasons, you have an upper hand when starting the business. You are essentially starting a business with subsidized costs.

The points I mentioend above are easier said than that. However it is always good to keep in mind the above points.