Oil & Gas - DBS Research 2016-04-20: Down but not out

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EZION HOLDINGS LIMITED 5ME.SI  SEMBCORP INDUSTRIES LTD U96.SI 

Oil and Gas - Down but not out 

• Low oil prices are here to stay; OPEC’s stance remains a wild card 
• M&A activities tipped to pick up; privatisation / takeover candidates – Baker Tech, POSH, Mermaid, Rig Tenders, MMHE 
• Buy refineries – PTTGC and BCP as near-term plays for low oil price 
• Accumulate SCI, Ezion and SapuraKencana on dips 

Unfruitful Doha talks raise near-term volatility. 

• We expect oil prices to average between US$35-40/bbl in 2016 (vs US$53.6/bbl in 2015). 
• In the near term, oil prices could stay volatile and weaken further on the back of refinery maintenance and sentiment-hit from collapse of output freeze talk in Doha. 
• The weak demand data, potential Fed rate hikes translating into stronger USD, and speculative pressures, could suppress oil prices before recovering somewhat towards the end of the year. 
• We expect a gradual recovery to US$40- 45/bbl in 2017 and US$55-60/bbl thereafter as production cuts filter through. 
• OPEC’s production stance and production disruption remain wild cards. 

Lower-for-longer oil prices set the stage for M&A activities. 

• The sector’s prolonged oil crisis and depressed valuations could catalyse more M&A activity, which had stalled last year due to price impasse. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. 
• We also expect to see a wider consolidation scale in the O&G industry as the players face further financial pain. 
• We identified several potential takeover / privatisation candidates in South East Asia – Baker Tech, Mermaid, POSH, Rig Tenders and MMHE. 

Selective BUYs on dips. 

• We have cautioned in mid-Mar that the two-week sharp rallies in oil price and O&G-related stocks could be short-lived in the absence of sustainable fundamental improvement, in our sector reports: “Singapore rigbuilders: Looming credit risks” and “Oil and Gas: Sinking further”. 
• Time to bottom-fish after the knee-jerk correction post-Doha talks? Near-term plays would be Thai refineries - PTTGC and BCP – which should benefit from low oil prices. 
• Investors with longer investment horizons might look to accumulate solid O&G names - SCI deserves a re-rating for its undervalued utility business at 7x PE and 0.7x P/BV; Ezion remains the best proxy to ride any oil price rebound and a near-term catalyst could stem from its successful foray into the Chinese windfarm market; SapuraKencana has a strategic business position which is stretched across the O&G value chain.

Pei Hwa Ho DBS Vickers | Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-04-20

BUY Maintain BUY 0.85 Same 0.85

BUY Maintain BUY 3.30 Same 3.30