Oil & Gas sector - OCBC Investment 2017-02-03: Interest is returning

Oil & Gas Sector SEMBCORP INDUSTRIES LTD U96.SI KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP MARINE LTD S51.SI EZION HOLDINGS LIMITED 5ME.SI

Oil & Gas sector - Interest is returning

Ever since OPEC announced that it will cut production – the first time in eight years – in late Nov last year, oil prices have increased from the mid $40s to the mid $50s currently, and investors keen to gain exposure to oil plays have generally focused on the large caps like Keppel Corp (+16%), Sembcorp Industries (+19%), Sembcorp Marine (+9%) and mid-sized Ezion Holdings (+20%), possibly due to concerns that some smaller companies would face greater financial difficulties under the tough environment, rightly or wrongly.
We note that there are still a number of smaller companies that are prudently managed and stand a good chance of surviving this market and reaping the benefits subsequently.
Meanwhile, our local rigbuilders Keppel and SembMarine still have to contend with issues in Brazil relating to Petrobras.

Despite some returning interest in the sector for fear of losing out during an oil price rally, we also get the sense that investors in general are still cautious about entering the sector in a big way, given that companies still use the words “challenging”, “difficult”, and “hunker down” to describe their operating outlook and plans. We also expect a fair number of them to report impairments in the upcoming full year results.
Other than some downstream players that are still operating fairly well, we find that the more optimistic companies are overseas oilfield services players servicing US shale, as rig count is inching up again with a recovery in oil price.

Meanwhile, it was recently reported that Saudi Aramco will be pulling out of the RAPID project in Malaysia, shelving plans for a partnership with Petronas relating to the US$27b refining and petrochemical project.
In response, Petronas has said that the project, which is more than 50% completed, will go ahead and is on track to be operational in 2019.
Looking ahead, we will also continue to monitor some companies in the sector; we note that Nam Cheong has a S$90m bond maturing in Aug this year, while Falcon Energy has a S$50m bond maturing in Sep.

Looking ahead, 2017 promises to be another eventful year, partly due to greater uncertainty in the macro environment, driven by political developments.
Investors are advised to be nimble amidst the uncertainties, but those with a longer-term horizon could consider accumulating on dips our preferred pick, Sembcorp Industries [BUY, FV: S$3.36], which has good exposure to emerging market growth and has been steadily growing its utilities capabilities over the years.
Maintain NEUTRAL on the broader sector.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-02-03

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.360 Same 3.360

HOLD Maintain HOLD 6.26 Same 6.26

HOLD Maintain HOLD 1.430 Same 1.430

BUY Maintain BUY 0.540 Same 0.540