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UOB KH: Oilfield Services Picks For Over 20% Upside
Aspire, Hot Picks | 03 February 2015
By: Lim Si Jie
Articles (169) Profile

With the recent fall in oil prices, oil companies are signalling that they will be “shifting from capital expenditure (CAPEX) to operating expenditure (OPEX) amid the lower oil prices” to “shore up utilisation and mitigate softer pricing”.

Research house, UOB Kay Hian points out that Singapore companies are regional/global service providers with “diverse footprints and experience” that can aid oil companies in improving utilisation of their holding assets.

Oilfield Services Sector: Low Valuations

UOB maintains an Overweight rating on the oilfield services sector amidst low valuations. The one year forward price-to-book (PB) and price-to-equity (PE) ratios for the oilfield services sector have fallen below the mean to one standard deviation away from the mean.

In other words, forward multiple valuation analysis shows that oilfield services sector is undervalued. UOB ranks Ezion, Pacific Radiance and Triyards as its top three buys.

Ezion: OPEX Spending To Boost Its Business
Ezion is seeing more enquiries for its liftboats and service rigs as oil companies shift their focus from CAPEX to OPEX in view of lower oil prices. Instead of spending on new oilfields, oil companies are going to focus on maintaining their oil production from existing fields. This includes the maintenance and reparation of existing production platforms.

One of the major concerns investors have is the inability to secure new contracts for Ezion’s refurbished service rigs (which were formerly old rigs of more than 30 years old). However, it will be encouraging for investors to know that Ezion has been able to secure new contracts at the current or higher charter rates for charter contracts of Ezion’s service rigs that are expiring in 2015.
UOB Rating: BUY
Target Price: S$1.55
Last Close: S$1.265 (02/02/2015)
Potential Appreciation: S$0.285 (+22.53%)

Pacific Radiance: Comparative Advantage Will Tide Them Through Rough Times

Pacific Radiance views the current low oil prices as a temporary glitch. Even conventional oil CAPEX is currently on a wait-and-see stance and OSV customers are opportunistic. The group’s belief is that a growing demand for oil while supply comes off will lead to a rebound in oil prices.

Moreover, Pacific Radiance has been building its vessels at rates that are 20-30 percent cheaper than market prices. The group expects to be “more competitive than industry peers” especially in tough times like this.
UOB Rating: BUY
Target S$1.00
Last Close: S$0.75 (02/02/2015)
Potential Appreciation: S$0.25 (+33.33%)

Triyards: Demand Still Healthy In Region
Demand for liftboats in the region remains resilient as they are mainly used in the OPEX cycle and in shallow waters. Management expects to maintain margins at 15-20 percent for new contracts despite the fact that operators are trying to capitalise on the market’s current weakness.

Potential near-term contracts include Ezion’s liftboat contracts worth US$150 million and contracts for 6 sophisticated OSV’s worth US$200 million from operators based in India.
UOB Rating: BUY
Target S$1.04
Last Close: S$0.465 (02/02/2015)
Potential Appreciation: S$0.535 (+115.05%)

Long Term Opportunities Aplenty
Given that stock prices have fallen to attractive valuation, this is an opportunity for investors with a longer-term outlook to enter. UOB continues to advocate a bottom-up strategy that favours companies with:

  1. An experienced and dynamic management
  2. Resilient business positioned in regional shallow and midwater depths or a cabotage market that has high barriers to entry
  3. Clearly-defined company-driven growth
  4. Good margins to cushion a potential industry downturn
  5. Cash calls that are strategic and EPS-accretive
  6. Healthy ROE

In the long run, investors will return to stocks that deliver earnings growth amid lower oil prices. Typically, these are shrewd companies that actively capitalise on business opportunities to grow earnings amid adversity.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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