Energy Sector - OCBC Investment 2019-07-02: More Than G20

SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51) KEPPEL CORPORATION LIMITED (SGX:BN4)

Energy Sector - More Than G20

A trade war between the world’s two largest economies has weighed on oil prices due to fears that slowing economic growth could dent demand for oil. The outcome from the G20 meeting was moderately more constructive than anticipated, and a near-term risk-on move may also support oil and related stocks, though relevant to the oil market are also the OPEC+ meetings that are being held on 1-2 July.
Going into the meetings, expectations were that the group would roll over its current production quotas, and indeed Putin said on 29 June that Russia has agreed with the Saudis to extend the OPEC+ deal at current production levels for the rest of this year and potentially into the early months of 2020. Should deeper output cuts result from the meetings, there would be a lift to oil prices.
On the other hand, it is also worth noting that Brent has risen by about 11% since 12 June, largely due to rising tensions in the Middle East.
The G20 talks have clearly eased trade tensions but beyond that if there is no meaningful progress between US/ China relations and if OPEC+ does not announce meaningfully deeper cuts to support prices, there may be a risk to the recent oil rally.

In Greater China, given that the Chinese government had already announced in March this year that the pipelines held by SOEs will be merged into a national pipeline company amidst a broader overhaul of the country’s energy sector, investors may first prefer to wait at the sidelines given the scarce details at this point in time.

In Singapore, SEMBCORP INDUSTRIES (SGX:U96) recently announced that it will be providing SEMBCORP MARINE (SGX:S51) with a five-year subordinated S$2b loan, which will be used by Sembcorp Marine to retire about S$1.5b of borrowings and for working capital purposes. To finance this, Sembcorp Industries will issue S$1.5b of bonds, with Temasek as one of its investors. This is a positive development for Sembcorp Marine, as it
1. alleviates earlier concerns of a potential equity fund raising exercise, and
2. possibly points to new order flow ahead.
For Sembcorp Industries, we see this as a better development compared to a potential rights issue that it would have had to support.
Our preferred pick is KEPPEL CORPORATION LIMITED (SGX:BN4), given its undemanding valuations and our belief that it is best positioned to ride out a downturn and capture opportunities during a recovery.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-02

SGX Stock Analyst Report BUY MAINTAIN BUY 3.030 SAME 3.030

HOLD MAINTAIN HOLD 1.600 SAME 1.600

BUY MAINTAIN BUY 7.830 SAME 7.830