Singapore Strategy - UOB Kay Hian 2019-09-25: Energy Correlation

Singapore Strategy - UOB Kay Hian Research | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4) SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51) COMFORTDELGRO CORPORATION LTD (SGX:C52) SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Strategy - Energy Correlation




The 14 September attack on two key oil assets in Saudi Arabia

  • More than a week has passed post the 14 September attack on two key oil assets in Saudi Arabia that curtailed around half of the country’s oil production capacity – equivalent to shutting down both Brazil’s and Kuwait’s oil production.
  • In our view, the attack is a game-changer as it used inexpensive and undetectable drones that managed to knock out 5% of global oil production, if only temporarily. This feat cannot be underestimated and we expect a US$2-4/bbl risk premium on oil prices in the near to medium term.
  • In our view, oil prices will continue to be buffeted by newsflow of when the Saudis will be able to get the lost production back up and running.

Impact on Asia.

  • Reuters reported that as a result of damage to its facilities, Saudi Aramco has to delay oil shipments to Asian oil refiners and replace light crude with medium to heavy grades. Asian refiners import 70% of their crude oil requirements from Saudi Aramco and fortunately are complex enough to deal with the lower-quality oil.
  • While there are no listed refiners here in Singapore, there are oil-related plays whose share prices show a reasonably high correlation with the Brent oil price.


KEY STOCKS MOST CORRELATED WITH BRENT OIL PRICE



WHO ISN’T CORRELATED?

  • At the opposite end of the scale, the STI, VALLIANZ (SGX:WPC) and COMFORTDELGRO (SGX:C52) showed little to no correlation to movements in oil prices on a 1-year historical basis. Interestingly, ComfortDelgro’s share price had a meaningful negative correlation to oil prices on a 5-year basis despite only 7% of its revenue being attributable to fuel costs.


COMMENTS ON THE CORRELATIONS

  • One would have expected exploration & production (E&P) companies to be most correlated to oil prices, given that their oil production would directly benefit from higher oil prices.
  • E&P companies in our sample include INTERRA RESOURCES (SGX:5GI) and RH PETROGAS (SGX:T13), while KRISENERGY (SGX:SK3) is suspended although operationally its current oil production may benefit from higher oil prices.
  • Offshore marine vessel owners and service providers as well as rig-building companies would only benefit if long-term oil prices increased, which may then lead to an increase in new rig or vessel orders.


CORRELATION BETWEEN BRENT OIL PRICE AND SGX-LISTED ENERGY STOCKS

Company 1-Year
Correlation
Coefficient
2-Year
Correlation
Coefficient
5-Year
Correlation
Coefficient
Description
STI 0.141 0.194 0.657 Straits Times Index
CHINA AVIATION OIL (SGX:G92) 0.883 0.394 0.274 Jet fuel supply and trader into Chinese airports
KEPPEL CORPORATION (SGX:BN4) 0.749 0.337 0.577 Offshore marine, property, asset management
SEMBCORP INDUSTRIES (SGX:U96) 0.735 0.249 0.240 Water and gas utilities, renewables
FALCON ENERGY GROUP (SGX:5FL) 0.721 -0.149 -0.235 Owns offshore supply vessels, warehousing & logistics and general support activities
BAKER TECHNOLOGY (SGX:BTP) 0.714 0.102 -0.110 Manufactures and provides specialized equipment for oil & gas sector
SEMBCORP MARINE (SGX:S51) 0.712 0.416 0.380 Rig and offshore vessel builder, conversions, ship repair & maintenance
INTERRA RESOURCES (SGX:5GI) 0.647 0.076 0.119 Oil & gas company with assets in Myanmar & Indonesia; 851bbl/day of production in 2Q19
CH OFFSHORE (SGX:C13) 0.617 0.042 -0.341 Owns 16 AHTS and one offshore supply vessel
REX INTERNATIONAL (SGX:5WH) 0.568 0.156 0.299 Has ‘proprietary technology’ to find oil, and owns non-producing assets in Oman
MERMAID MARITIME (SGX:DU4) 0.562 0.185 0.188 Provides subsea and drilling services
RH PETROGAS (SGX:T13) 0.425 0.322 0.201 Oil & gas company with assets in China, Indonesia & Malaysia; 4,080boe/day of production in 2018
SINGAPORE AIRLINES (SGX:C6L) 0.324 0.266 -0.262 Singapore’s national airline
KIMHENG OFFSHORE & MARINE (SGX:5G2) 0.289 0.262 0.279 Owns two shipyards in Singapore doing newbuilding and repair & maintenance
DYNA-MAC (SGX:NO4) 0.220 0.023 0.172 Engineering, fabrication and construction of offshore assets
VALLIANZ (SGX:WPC) 0.114 -0.008 -0.063 Owns 62 OSVs and operates in Middle East, Africa, and Asia Pacific
COMFORTDELGRO (SGX:C52) 0.025 0.189 -0.452 Land transport company with over 42,000 vehicles in 7 countries





Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-09-25
SGX Stock Analyst Report BUY MAINTAIN BUY 7.610 SAME 7.610
HOLD MAINTAIN HOLD 2.29 SAME 2.29
HOLD MAINTAIN HOLD 1.220 SAME 1.220
BUY MAINTAIN BUY 2.950 SAME 2.950
HOLD MAINTAIN HOLD 9.500 SAME 9.500



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