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OCBC Neutral On O&G; Makes Picks With Over 15% Potential Upside
Aspire, Hot Picks | 02 December 2014
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By: Simeon Ang
Articles (125) Profile

Since September 2014, the oil and gas sector in Singapore has taken a beating. The chief reason for this appears to be oil prices which commenced its fall since late July 2014. Then, the main reason for the fall in oil prices was due to dampening energy demands as well as a surge in oil supply from the US. The chart below shows just how far oil has fallen and how much the FTSE Singapore Oil and Gas index has followed.

Source: FactSet. Chart comparing WTI Oil Prices (Blue) and FTSE ST Oil & Gas (Green)

If oil prices are anything to go by, the International Energy Agency opines that the dramatic fall does not appear to end anytime soon. According to CNBC, the agency states that “weak demand, a strong (US) dollar, and booming US oil production” could ensure that oil prices remain depressed for some time to come.

Source: FactSet. Chart comparing FTSE ST Oil & Gas (Blue) and the Straits Times Index (Green)

Contrast the performance of the oil and gas sector with the broader Straits Times Index, we can see the obvious underperformance of oil and gas counters in general. Despite the underperformance, OCBC is in no hurry to snap up value buys. In fact, the research house does not “see strong re-rating catalysts in the near term”.

The research house said that moving forward, downside risks will continue to be present, particularly the rate in which projects are awarded. Other key risks highlighted by OCBC include:

  • International oil companies’ focus on short-term share holders’ returns, resulting in smaller contracts.
  • Possibility of a credit crunch should short term outlook deteriorate.
  • High indebtedness amongst some oil and gas companies.
  • Rising interest rates that may affect companies with unfavourable debt maturity profiles.
  • Subdued oil price environment.
  • High breakeven costs in some segments of the oil and gas industry.

While OCBC continues to sing the blues with regards to the oil and gas sector, the research house does offer some advice for investors who are keen to add oil and gas counters to their portfolios. Citing the need to take on a defensive stance, OCBC said that some counters still present strong long-term fundamentals. OCBC picked two major names for investors to consider:

Name: Keppel Corporation (Keppel Corp)
Closing Price: $8.56 (1 December 2014)
YTD Performance: -23.8 percent
OCBC’s Call/Target Price: BUY / $$9.89
Potential appreciation: 15.5 percent

OCBC likes Keppel Corp for its established brand name as well as exposure to shallow-water exploration and development activities. These activities are still viable at current levels of oil prices. In addition, the research house notes that Keppel Corp maintains exposure to property, infrastructure, and investments. These sectors should be able to cushion any possible drastic fall in the group’s offshore and marine division.

Name: Ezion holdings (Ezion)
Closing Price: $1.175 (1 December 2014)
YTD Performance: -37.1 percent
OCBC’s Call/Target Price: BUY / $$2.04
Potential appreciation: 73.6 percent

OCBC likes Ezion largely because downside risks to its earnings are relatively low. Currently, all of Ezion’s liftboats and service rigs (including those yet to be delivered) have secured charter contracts. In addition, Ezion does not perform any speculative building (i.e. the company only builds if there is specific demand for the vessel). With FY15 and a significant portion of FY16′s financial performance largely secured, the company looks to be a value buy at current prices.

Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Keppel Corp  5.930 +0.01 +0.17%   
Business: [FY18 Turnover] Infrastructure (44.1%), offshore & marine (O&M) (31.4%), property (22.5%), investments (2%).

Insight: Apr-19, 1Q19 revenue rose 4.1% underpinned by high... Read More
Ezion Hldgs  -- -- --   
Business: Co develops, owns, and charters offshore assets to support the offshore energy markets. [FY17 Turnover] Liftboats (49.7%), Jack-up Rigs (39.5%), Offshore Support Logistic Services (10.8%).

Insight: Aug-18, 1H18, Co returned to the black with a net ... Read More

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