Bernstein On Cruise Lines: Taking Stock Of Oil Risk

Contrary to recent concerns, Cruise lines appear well-positioned to withstand a moderate increase in oil prices in the near term, and the greater risk seems to be increased share price volatility caused by “oil-related headlines or a sustained increase in oil prices in the absence of a stronger economy,” Bernstein’s David Beckel said in a report.

Concerns around rising oil prices have rarely emerged for the sector, despite oil being close to record low prices for most of 2016, Beckel noted.

Cruise Lines Can Weather Oil Price Increases

The OPEC (Organization of the Petroleum Exporting Countries)'s decision announced on November 30 signaled “a renewed willingness among OPEC nations to collaborate,” suggesting a greater risk of oil price hikes going forward.

Beckel mentioned, however, rising oil prices would likely have only a “muted” impact on the results of cruise lines. He mentioned three reasons for this:

1. Cruise lines actively hedge out fuel exposure.
2. Fuel and forex tend to be negatively correlated over time.
3. Rising oil prices may be accompanied by a strengthening economy.

The analyst estimated that an oil price increase of $5 per barrel would result in only a low- to mid-single-digit decline in EPS, “due primarily to the heavily hedged fuel exposures among the Cruiselines.” He added, however, that constant news flow regarding the risk of higher oil prices could cause share price volatility.

Beckel maintains Outperform ratings on Royal Caribbean Cruises Ltd (NYSE: RCL) and Carnival Corp (NYSE: CCL), with price targets of $102 and $63, respectively. He has a Market-Perform rating and a price target of $43 on Norwegian Cruise Line Holdings Ltd (NASDAQ: NCLH).