Oil & Gas sector - OCBC Investment 2016-09-21: Don’t forget the downstream players

SEMBCORP INDUSTRIES LTD U96.SI PEC LTD IX2.SI

Oil & Gas sector - Don’t forget the downstream players

The market has been overly focused on low oil prices and beleaguered companies such that certain segments of the broader industry have been forgotten.
In the midst of all the doom and gloom, companies catering to the downstream segment are still operating well, a few even turning around from previous years’ negative results. The oil glut has led to a shortage of storage facilities around the world, and while the biggest beneficiaries are likely the domestically entrenched EPC providers and terminal owners, there remains a chance that SGX-listed companies such as PEC Ltd, Rotary Engineering, Mun Siong Engineering and Hiap Seng Engineering can benefit as well.

Our locally listed companies can look forward to places where they have a foothold in, such as Malaysia, Indonesia, and Thailand where construction of large oil terminals are still taking place.
A new liquid bulk terminal will also be built in Jurong Port in Singapore, opening up opportunities for bidding. Work is also being eyed in the Middle East, where PEC and Rotary have secured work in Fujairah in recent years.
The biggest market probably lies in China, which is aggressively building up its strategic petroleum reserves after the drastic fall in oil prices – the country has 233m barrels of reserves1, representing 30 days of net crude imports and well short of IEA’s 90 days strategic reserve target – but we understand that margins are low and tough for foreign players to compete.
Many of the projects are also awarded to the engineering subsidiaries of the state-owned owners of the terminals, such as HK-listed Sinopec Engineering.

In our screening, we find that PEC, which is currently trading at about 0.6x book, actually has a net cash position (S$132m) that is close to its current market capitalisation (S$135m). The company turned around from a net loss in FY15, and raised its total dividend for FY16 as well. Meanwhile, operating cashflow has remained healthy throughout the years.
In general, a few of the locally-listed downstream players are trading at low levels like their upstream counterparts, which may not be justified given continuing order momentum and recurring work from plant maintenance activities.
As for the broader oil and gas sector, we maintain our NEUTRAL rating with Sembcorp Industries [BUY, FV: S$3.07] as our preferred pick.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-09-21

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.07 Same 3.070

NOT RATED Maintain NOT RATED 99998 Same 99998