Contrarians play on rising oil prices

Feeling contrarian? With oil prices at levels not seen since war times, investors the world over are dumping the shares of companies that have to buy a lot of oil and loading up on the shares of those who sell it.

In Asia, that means carriers such as Cathay Pacific Airways and power companies such as Korea Electric Power Corp (Kepco) are getting hit while oil stocks, including PetroChina, are strong.

Crude prices have exceeded US$35 a barrel on concerns that the Organisation of Petroleum Exporting Countries will fail to solve supply shortages.

Yet some brokers recommend investors use the present dynamics to pick up quality airlines and dump weaker oil firms.

Goldman Sachs recently pointed out that Cathay fell 40 per cent on the back of a jet-fuel price spike last winter, despite favourable outlook on flight demand. After the March Opec meeting, it recovered and outperformed the Hang Seng Index.

In the past month, Cathay has underperformed the index by 12.78 per cent.

'We maintain a market outperformer rating due to strong long-term industry fundamentals,' Asian strategist Anand Aithal said.

The brokerage also backs Kepco, a utility which is particularly sensitive to oil prices.

Goldman oil analyst Paul Bernard reckons each US$1 per barrel rise in oil above his base-case assumption of $27 for this year would reduce Kepco's earnings before interest, tax and dividends by 1.1 per cent.

Yet he believes the stock has been brutally oversold and is more than worth the money at present prices.

Goldman is not recommending investors drop PetroChina - it sponsored the listing, after all - but does think now may be a good time to sell Tenaga Nasional of Malaysia and S-Oil Corp of South Korea.

A dedicated contrarian would short oil stocks such as PetroChina - up 26.84 per cent from a summer low of HK$1.49 reached on July 11. However, its recent performance has been sturdy but not ecstatic - at $1.89, it is down from $2.05 reached on August 28.

Mansion House Securities research head Stanley Ng Wing-chark - while not a shorter - is pinning some expectations on the many forces fighting against rising oil prices.

'I still believe there won't be a very substantial upside for oil prices because of additional [political] pressures,' Mr Ng said. 'You've got protests on the streets of France, the US Government continues to apply pressure.'

Any substantial bets would be risky, however.

Credit Suisse First Boston transport analyst Peter Hilton said: 'These are much higher oil prices than anyone anticipated and if they are maintained - and we think they will remain reasonably high - they will [affect] profits.'