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World Fuel Services' Shares Could Take Off

Chuck Marvin

With crude oil poking its head near 52-week highs, lots of energy companies are getting rich these days. One of them is likely World Fuel Services (INT).

While it is difficult to know for sure -- the company's executives don't like talking much in between quarterly announcements and don't report until after the close of trading on Thursday -- what is apparent is that World Fuel's stock hasn't benefited from the recent run-up in crude oil and petroleum product prices. This disconnect cannot last forever, and some investors are starting to see the stock as a value play.

Through its aviation, marine and land business segments, World Fuel is a reseller of fuel to customers such as governments, airline operators, tanker fleets and ground distribution networks. With a $1.1 billion market cap, World Fuel is small in the land of 12-figure oil giants. However, the role that the company plays in the energy sector is truly global in scale.

The resale fuel business is highly segmented, comprised of many small operating entities throughout the globe, says JPMorgan analyst Jonathan Chappell. World Fuel is the only publicly traded company of its size in the industry, he says.

Among other functions, World Fuel helps its clients manage risks associated with fuel by providing real-time data, reducing price volatility and eliminating quality concerns. The company operates through 43 offices in 23 countries around the world, according to its Web site.

The prices that the company pays for its fuel are either market-based or government-regulated, according to the firm's most recent annual report. It pays for its fuel and trades in derivatives, in ways that mitigate its own price risks.

In 2006, World Fuel reported revenues of $10.8 billion, compared with $8.7 billion in 2005. It earned $214.1 million in income in 2006, compared with $178.7 million the year before.

While roughly 53% of World Fuel's revenues came from its marine segment and 43% came from its aviation segment in 2006, the company's aviation segment has higher margins and produces more income than its marine business, according to its most recent annual report.

Thus, it is no surprise that World Fuel's stock usually trades in high correlation with crude prices in general -- and with jet fuel prices in particular. World Fuel shares peaked near $50 in July 2006, when crude prices broke the $75 level and jet fuel prices reached their 52-week highs. When crude prices fell later that fall, World Fuel's stock followed crude lower.

Fuel prices retraced some of their losses in November 2006, and World Fuel's stock followed suit. However, in December 2006, jet fuel prices at the New York Harbor fell from $1.93 a gallon to $1.58 a gallon. Later, in May of 2007, World Fuel reported earnings of 51 cents a share, missing the 60-cent analyst target by 15%. In its quarterly report, the company blamed low jet fuel prices for its poor performance.

After bottoming out in mid-January, crude oil and jet fuel prices have been on a tear. Crude advanced from $50 a barrel to above $78 last week, before settling near $72 on Tuesday. Jet fuel has jumped from $1.58 a gallon to near $2.20 a gallon today.

If low jet fuel prices hurt World Fuel's stock price in the first quarter, it stands to reason that high jet fuel prices would help boost shares today. But that hasn't been the case.

Source: U.S Energy Information Administration