Negative Oil | Air NZ Downgrade

21 April 2020

Global markets were mixed overnight, with US markets retracing (S&P500 -1.8%) as plummeting oil prices plagued the market.
Energy stocks fell as West Texas Crude Oil futures expiring Tuesday plunged to a negative value for the first time ever, meaning that people are being paid to accept barrels of oil, while June prices fell 4% to US$20 a barrel. Demand destruction for oil and the inability to store excess oil supply is wreaking havoc in the oil market.
It is a big week of corporate earnings for the US which will highlight the recent damage done to the economy by covid-19 and start to paint a better picture of what the outlook looks like versus what the market appears to have priced in.

Closer to home, the big news as NZ announcing almost another week of level 4 lockdown, before entering into level 3 (Tuesday 28 April) which would allow some sectors to partially open such as construction, manufacturing and forestry (in a safe and limited contact manner). Broad based retail (in store walk in's, malls, dine in cafe's, restaurants and bars) would continue to remain closed, with contact-less retail allowed to operate such online orders, deliveries and drive-through. 


Air New Zealand (AIR:NZX / AIZ:ASX)

Air NZ (AIR) shares were heavily hit due to the covid-19 pandemic and surprisingly have recovered somewhat. Unfortunately its business is unchanged under level 3, as unnecessary travel remains banned.

The recent pick up has been largely due to retail investors who appear optimistic on a rebound. We do not share the same view given AIR NZ has virtually zero revenue and a large amount of cashburn (even with planes not flying), meaning Air NZ would have to operate near full capacity for a couple of years to offset these current short-term losses.

A return to normal domestic travel, which may be on the cards shortly (but still no guarantee) does not justify its current share price, with the government loan not overly friendly to shareholders.  

Given any delay in a return to international tourism can be very costly to Air NZ, we change our recommendation on Air NZ to SELL based on its current 'inflated' valuation.

Members should look out for a full update on AIR to be released in our weekly report.


Australia & New Zealand Market Movers

The Australian market fell (ASX -2.5%) on Tuesday, suffering its worst day in three weeks, with the main drag being the energy sector with oil prices plummeting with (virtually) no demand and diminishing oil storage capacity.

Virgin Australia will be put into voluntary administration after the Australian government rejected a late appeal for a $100m grant, with two key buyers likely to operate it as  a scaled back domestic operator.

It was also reported that the Canadian bidder (Alimentation Couche-Tard) for Caltex had now walked away from its original $8.8 billion (or ~$35.25 per share), due to the heightened economic uncertainty caused by covid-19 and inability to come up with a new offer which reflects current market conditions that would satisfy the board. 

The NZ market was basically flat yesterday (NZX 50 down -0.1%). Metlifecare shares rose +8% after announcing an operational update and that it believes  there is no lawful basis for APVG to terminate the $7 per share takeover – which could imply a long court battle.
Kiwi property group shares held firm, despite reporting a -8.5% drop in the value of its property portfolio with retail and mixed use property taking an expected downward hit with a new net tangible asset valuation per share of $1.24, with debt levels at comfortable levels given new valuation and recently cancelled dividend to retain cash.


3 Things Markets Will be Watching this Week

  1. Coronavirus related news-flow remains key in terms of market moves.
  2. US corporate earnings will be in focus with some big names reporting in the US, including Amazon and Netflix.
  3. Capital raising announcements by companies are growing as companies ask for cash from investors in this uncertain period.


Have a Great Day,


Energy stocks fell as West Texas Crude Oil futures expiring Tuesday plunged to a negative value for the first time ever, meaning that people are being paid to accept barrels of oil, while June prices fell 4% to US$20 a barrel.

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