Some Industrial Companies Could Suffer From Lower Oil Prices
As if investors didn’t have enough to think about, Saudi Arabia’s decision to produce more oil in retaliation for Russia’s refusal to reduce output sent benchmark crude-oil prices down more than 20% Monday.
Stock in oil producers, of course, is plummeting as a result.
(ticker: BP) shares, for instance, are down about 18%.
(XOM) stock is off about 10%. Stock in the oil-services giant
(SLB) is down an incredible 29% in midday trading.
But oil’s decline won’t affect just energy companies. Industrial companies generate, very roughly, 10% to 20% of total sales from the energy sector. There will be pain for them as well.
It’s difficult to get aggregated sales data by industry. We formed estimates of industrials’ exposure to the energy sector based on transcripts, company filings and presentations, as well as some company and analyst comments. Industrial exposure can come from multiple parts of the energy value chain: Upstream, where energy companies are exploring for oil; midstream, where oil is transported and refined; as well as downstream, where oil is turned into products such as plastics.
Here are some of the industrials with higher-than-average energy exposure, according to our rough estimates.
(FLS) generates about 40% of sales from all parts of the energy value chain. Its valves and seals can be found all over the energy industry.
- Gardner Denver is now part of
(IR). And Rand is going to spin off its climate division Trane Technologies soon. Before the deal, Gardner generated about 40% of sales from energy selling pumps and compressors. As part of Ingersoll—once Trane is divested—the exposure should fall, but remain relatively high.
- Rails, broadly speaking, have about 20% of sales generated from energy end markets. That’s transporting crude, but mostly coal. All energy prices are linked. Falling crude puts pressure on natural gas and coal to some extent.
(UNP) stock, for instance, is off 8.8%.
(NSC) is down 6.1%.
(HON) generates, very roughly, 15% of its sales from energy. The company sells control systems for chemical plants. It also supplies catalysts to refining and petrochemical firms.
(ROK) is in the same boat as Honeywell, supplying systems for plant control. We estimate its exposure is roughly 15% as well.
- The equipment rental players—such as
(HRI)—rent into the energy space. What’s more, weakness there can create oversupply in other end markets such as construction. United Rentals and Herc share are both down about 11% Monday.
- Distributors such as
(GWW) sell myriad small things to thousands of businesses. We estimate they generate about 5% to 10% of sales from customers in energy. These shares, however, are more of a proxy for the health of the overall industrial economy than for what’s going on in energy markets Monday.
(GE) isn’t as “oily” as it once was, but it still owns plenty of
(BKR) stock, about 36.8% to be more precise. Baker is down 23%, GE is down about 11%.
- Meanwhile, a host of companies use oil and oil derivatives as inputs, and could benefit from lower oil prices.
(SHW), for instance, makes paint from oil derivatives. Its costs are falling and its share are only down 1.7%. Oil can account for about 30% of total costs.
(BERY) also buy a lot of oil-based materials to make their packaging products. But those two stocks, on average, are down about as much as the market Monday.
- Airlines, of course, like lower oil prices. About 15% of total costs are often times jet fuel. But the spread of coronavirus, or Covid-19, is hitting travel demand, making that issue a much bigger deal for the sector.
This, of course, isn’t a complete list. More comments from management teams presenting quarterly earnings or meeting with investors at spring conferences will help fill out the picture.
Write to Al Root at firstname.lastname@example.org