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Cowen Issues 'How-To' Guide for Playing Oil Price Fluctuations (KNX) (AAL) (MO) (NEM) (XOM) (more...)

January 15, 2015 1:23 PM EST
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Price: $52.62 -2.81%

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The implications from the 55% plunge in oil prices since their mid-June highs are wide-spread. Opportunities and pitfalls are abound. Today, Cowen and Company offered an extensive 66-page how-to guide for playing the oil price fluctuation in more than 20 sectors. The firm identified more than 60 stocks that could benefit from oil price movements.

Below is a look at sectors and stocks to play in an declining oil price environment and alternative a risking oil price environment

Airfreight & Surface Transportation (Jason Seidl) - Trucking - TL carriers usually benefit from a decline in oil prices, but LTL carriers have historically made money off surcharges in a rising fuel price environment. Hence, we would view the recent fall in energy prices as a minor negative for the publicly traded LTL carriers; Rail - Lower crude shipments could be detrimental to the railroads, but the potential negative impacts on rail pricing power from the deceleration in crude shipment growth are likely to be more than offset by pent-up demand for rail service in other commodities and strained capacity across transportation modes

  • Declining oil price environment: Celadon Group (NYSE: CGI), Covenant Transportation (NASDAQ: CVTI), Knight Transportation (NYSE: KNX), Swift Transportation (NYSE: SWFT)
  • Rising oil price environment: ArcBest (NASDAQ: ARCB), Canadian National Railway (NYSE: CNI), Canadian Pacific Railway (NYSE: CP), JB Hunt Transport Services, Inc. (NASDAQ: JBHT), Old Dominion Freight Line (NASDAQ: ODFL), Saia, Inc. (NASDAQ: SAIA)

Airlines (Helane Becker) - Though all airlines in our coverage universe will see potential >$40 billion in aggregate fuel savings from lower prices in 2015, all companies except for American Airlines and Allegiant Travel hedge jet fuel and could see cost headwinds related to mark-to-market hedge losses. We forecast, for example, a $2B hedge-related loss at Delta Air Lines in 4Q14, a $0.5B loss at Southwest Airlines, and a $0.2B loss at United.

  • Declining oil price environment: American Airlines Group (NASDAQ: AAL), Southwest Airlines (NYSE: LUV), United Airlines (NYSE: UAL)
  • Rising oil price environment: American Airlines Group (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), Virgin America (NASDAQ: VA)

Beverages & Tobacco (Vivien Azer) - Falling pump prices look to be a benefit for carbonated soft drinks, as 30% of sales are generated in the convenience and gas channel; however, we believe that on closer examination the benefit from the gas price decline was short-lived, as volumes are again in decline. The better soft drink pricing likely reflects the halo effect of broader consumer price inflation.

  • Declining oil price environment: Dr Pepper Snapple Group (NYSE: DPS), Altria Group (NYSE: MO), Constellation Brands (NYSE: STZ), Molson Coors Brewing (NYSE: TAP)
  • Rising oil price environment: Craft Brewers Alliance (NASDAQ: BREW), Boston Beer Co. (NYSE: SAM), Constellation Brands (NYSE: STZ)

Chemicals (Charles Neivert) - The misperception that falling oil will sharply impact ethylene margins has created a downdraft around US chemical shares. We believe shares in our space have declined by more than their earnings will ultimately indicate, as the actual decline in ethylene margins may be smaller than the market is expecting. This is due to the numerous ways to measure ethylene margins, as they vary greatly from region to region as a result of different feedstock and co-product values. The outcome of lower oil on ethylene margins may therefore be substantially different than the first pass analysis implies.

  • Declining oil price environment: None
  • Rising oil price environment: LyondellBasell Industries (NYSE: LYB), Westlake Chemical (NYSE: WLK)

Clean Technology (Jeffrey Osborne) - Solar: Demand and/or feasibility of solar energy has been widely misperceived as influenced by the price of oil. However, the solar market is primarily driven by regulatory standards and cost of capital. Furthermore, well over 90% of world electricity production and pricing is not from or linked to oil. Clean transportation: Specifically companies involved in vehicle electrification have exhibited correlation to oil prices, despite the resilience of the EV/PHEV market; 2014 demand of electrified vehicles continued to grow in the double digits with demand more so driven by fuel efficiency standards than pricing of traditional fuels. Ethanol: Despite ethanol posing as an alternative to traditional fuels, the relationship between ethanol and gasoline has been ignored and/or partially misperceived. Due to the minimum 10% blending requirements of ethanol in gasoline, the low-priced gasoline that has emerged in tandem with oil prices has stimulated greater driving demand, and thus more ethanol blending and consumption.

  • Declining oil price environment: None
  • Rising oil price environment: Chart Industries, Inc. (NASDAQ: GTLS)

Energy and Engineering & Construction (Daniel W. Scott) - Coal - Given the minimal contribution of petroleum to US electricity generation, there is little, if any, displacement of coal burn. Within the coal sector, lower crude prices mean lower diesel fuel prices and that disproportionately favors the operating cost structure of surface mining producers in the Powder River Basin. Given diesel and related fuel costs comprise ~15% of total production costs, we expect lower crude to benefit all PRB producers; we highlight Arch Coal as a clear winner given its diesel hedge strategy (primarily consisting of out of the money call options), which protects the company from elevated diesel levels and enables it to benefit fully in the downside of fuel costs. E&C – Our coverage within the E&C space is biased towards names levered to the North American energy boom. Sustained low crude prices will likely weigh on investment decisions for major N. American energy projects that are sponsored by integrated oil companies. Upstream projects all the way down to LNG export terminals are at risk of deferral or cancellation, although we continue to view U.S. petrochemical projects favorably. We highlight CBI as least at risk due to the status of its two major energy projects (Cameron, Freeport LNG) already in construction, as well as JEC, whose focus on smaller projects and diversification across end markets position it well in the event crude prices remain depressed.

  • Declining oil price environment: Arch Coal (NYSE: ACI), Alliance Resource Partners (NASDAQ: ARLP), Cloud Peak Energy (NYSE: CLD), CONSOL Energy (NYSE: CNX), Foresight Energy LP (NYSE: FELP), Hallador Energy (NASDAQ: HNRG), Jacobs Engineering (NYSE: JEC)
  • Rising oil price environment: Peabody Energy (NYSE: BTU), Cloud Peak Energy (NYSE: CLD) and all E&C names

Industrials & Flow Control (Joseph Giordano, CFA) - While savings at the pump for consumers and municipalities should generally support construction/maintenance activity and renovation spending, we are wary of potential high-level fallout in regions levered to oil production. Areas such as Texas and North Dakota saw high building permit growth rates in 2014 (~13% and 19% respectively vs. 4% for U.S. total) and Texas represented ~16% of TTM US housing permits, but local employment may fall in 2015 as oil drilling declines and local housing markets may see downturns.

  • Declining oil price environment: Mueller Water Products, Inc. (NYSE: MWA), Watts Water Technologies (NYSE: WTS), Xylem (NYSE: XYL)
  • Rising oil price environment: Flowserve (NYSE: FLS), Pentair Ltd. (NYSE: PNR)

Integrated Oil (Asit Sen, CFA)

  • Declining oil price environment: Royal Dutch Shell (NYSE: RDS-A), Total S.A. (NYSE: TOT), ExxonMobil (NYSE: XOM)
  • Rising oil price environment: Bunge Limited (NYSE: BG), Occidental Petroleum (NYSE: OXY)

Metals & Mining (Adam P. Graf, CFA)

  • Declining oil price environment: Yamana Gold (NYSE: AUY), Kinross Gold (NYSE: KGC), Newmont Mining (NYSE: NEM)
  • Rising oil price environment: Barrick Gold (NYSE: ABX), Agnico Eagle Mines Ltd. (NYSE: AEM), Goldcorp (NYSE: GG)

Metals & Mining (Anthony B. Rizzuto, Jr.) - Hot-rolled coil serves as feedstock for tubular products, and we think that lower OCTG demand, driven by the collapse in oil prices, is negatively impacting U.S. HRC prices. Prices have fallen over $100/st from the recent high of $683/st in August 2014. With roughly 50% of the U.S. tubular market comprised of welded pipe, we estimate that the requirement is nearly 4MM st of HRC feedstock. The potential decrease in rigs and drilling activity may reduce feedstock demand and lead to additional HRC in the market, further pressuring prices, in our opinion.

  • Declining oil price environment: None
  • Rising oil price environment: Nucor (NYSE: NUE), Reliance Steel (NYSE: RS), Steel Dynamics (NASDAQ: STLD), U.S. Steel (NYSE: X)

Retailing/Specialty Stores and Apparel, Footwear & Textiles (John Kernan, CFA)

  • Declining oil price environment: Burlington Stores (NYSE: BURL), Nike (NYSE: NKE), Under Armour (NYSE: UA)'
  • Rising oil price environment: None

Retailing/Specialty Stores and Broadlines & Department Stores (Oliver Chen, CFA) - We believe that the consumer is on pace for gas savings of up to $100-$150 billion in 2015, but the upside will not be distributed equally among our companies. Most of the companies within our coverage universe show strong positive correlations to rising gas prices, likely due to a rising macroeconomic tide lifting all boats. We believe broadlines retailers, namely WMT and TGT, are best positioned to benefit from gas deflation.

  • Declining oil price environment: Target (NYSE: TGT), Wal-mart (NYSE: WMT); longer-term Nordstrom (NYSE: JWN), Kohl's Corp. (NYSE: KSS), Macy's (NYSE: M)
  • Rising oil price environment: American Eagle Outfitters (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), Ascena Retail Group (NASDAQ: ASNA)


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