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DMG: Oil Poised For Recovery, Grab These Stocks For Over 20% Upside!
Aspire, Hot Picks | 26 February 2015
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By: Lim Si Jie
Articles (169) Profile

Nobody predicted that oil prices would fall below US$50/barrel. Largely because of this, market sentiments have grown overwhelmingly bearish and also fearful. However, DMG believes “the sentiment has overshot to the negative, setting the stage for a rebound” now that oil prices have over-corrected for a marginal increase in supply.

Spare Oil Capacity

Source: IMF, BP c/o Oxford Institute for Energy Studies; chart on spare oil capacity versus oil demand

The key reason for oil prices to collapse in the 1980s and stay low for an extended period was a capacity overflow. Spare capacity in the 1980s reached close to 18 percent of global oil demand. However, spare capacity right now is a “mere 4-5 percent of global oil demand,” notes DMG.

Basic Economics Prevail

Source: Rystad Energy 2014; chart on global marginal cost curve for oil production

Oil demand generally fluctuates but is currently growing to match supply. This means that speculators will eventually have to push oil prices back up.

The global marginal cost of production, for the 90th million barrels of production per day is US$70/barrel to break-even. Basic economics states this cost has to be covered, or else this supply will diminish in the long run.

DMG’s Strategy: High Growth, Low Valuation Small And Mid Caps

Amidst the chaos of dipping oil prices, some companies will benefit and grow. DMG Research believes in the potential of low-valued small or mid-caps’ high growth. DMG’s top picks are Giken Sakata, Ezion and Nam Cheong (in order of preference).

Giken Sakata (BUY, TP: $0.65): Low Cost Onshore Producer

Production is expected to improve from the current two fields to five this year. DMG expects this production surge will “more than offset any oil-price changes.”

With costs being on par with OPEC producers, Giken’s management is likely to be unfazed by the oil market conditions and will continue to drill. Giken will also be securing more acreage and signing new old-wells contracts. DMG opines that Giken, the largest old-well operator in Indonesia by far, will continue growing its portfolio and maintain its dominant position.

Ezion (BUY, TP: $2.65): Blue Ocean Strategy Still Paying Off

Ezion embarked on a “blue ocean” strategy as the only liftboat operator in APEC. Ezion has intelligently cooperated with potential competitors. Even till today, five years since it began its blue ocean strategy, there is still no second player in this industry on a regional scale.

DMG sees “potential for earnings to double within three years even from the current record highs” as the Asia Pacific market remains under-served by this operationally-superior asset.

Nam Cheong (BUY, TP: $0.58): Dominant Shallow-Water Support Vessel Builder

Nam Cheong is now the largest shallow-water Offshore Support Vessel (OSV) builder in the world with its 15 percent market share. DMG believes its “build-to-stock model has effectively disrupted the industry, giving customers the new flexibility to bid for contracts without initial asset ownership”. This model is especially appreciated in the current uncertain climate.

Nam Cheong’s building programme includes a good mix of production-focused assets such as accommodation work boats and work barges, which will continue to enjoy strong demand today. DMG notes that “Nam Cheong will emerge from this downturn with a stronger market position and customer ties.”

Keppel Corp (BUY, TP: $11.10): Near Market, Near Customer Strategy

Keppel adopts a “Near Market, Near Customer” long-term strategy, and executes this by entering developing markets very early. Its early entry into Brazil had paid off, with its established yard enjoying rather smooth operations. Keppel’s Mexican yard agreement is expected to be completed within this year.

On top of its strategic positioning, Keppel has a strong design capability, with new products such as the Floating Liquefied Natural Gas (FLNG) vessel design, its harsh environment rig designs, and its ability to customise drill ship design.

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.

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
Nam Cheong  -- -- --   
Business: An offshore marine group specialising in the building of offshore support vessels. [FY18 Turnover] Shipbuilding (59.2%), vessel chartering (40.8%).

Insight: May-19, 1Q19 revenue jumped multiple times to RM29... Read More
Keppel Corp  6.120 -0.03 -0.49%   
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

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