Over the last month, I had been pretty tame in terms of stocks action partly due to my newborn and the market volatility. Now, New Year, New Hopes! In particular, with the low valuation of O&G stocks in Singapore, I am hawkish. Let’s review some of the interesting companies in the watchlist below.
Oil Price 5 ½ year low
Oil price ends 2014 on a 5 ½ year low. Brent and Crude at US$57 and US$53 a barrel respectively i.e. 45% decline since a year ago. According to Business Times few days back, Market cap of 23 O&M firms listed on SGX fell 15.7% (S$5.77b) over period from Nov 4 to Dec 4. To provide some assistance in your selection from above table, below are extract of views from the industry people interviewed by Business Times.
Look out for Companies with Superior Business Models
"The scenario of low valuations will not only present attractive opportunities for the stronger companies to acquire assets, it could allow diligent investors who can identify O&M companies with superior business models to ride out this down cycle, to have an opportunity to acquire shares at relatively cheap valuations" - Darren Yeo, Vallianz CEO
Look out for those with NOC as End Customers
"A lot depends on who the O&M companies do business with. International Oil Companies (IOCs) tend to be more profit-oriented, some of them have already announced cuts in their capital expenditure in 2015. However these cuts relate mainly to exploration activities. Other the other hand, National Oil Companies (NOCs) generally have relatively stable expenditures for their E&P activities. Although they may take the opportunity to pare costs, we believe it will be “business as usual” for these NOCs." - Darren Yeo, Vallianz CEO
Oil Price recovery by 2nd Half 2015
“We are expecting crude oil prices to begin stabilizing in the first half of 2015 followed by a recovery in the second half of 2015. We anticipate that demand for oil next year will be fuelled by accelerating growth in the economies of the USA, Japan, the UK and certain regions of Europe.” - Darren Yeo, Vallianz CEO
Possibilities of Takeovers and Consolidation
"Low valuation of of O&M companies could lead to takeovers, privatizations or share buy-backs" - Deputy CEO Miclyn (former CEO Jaya) Venka Shesh.
Oil Price Correction
"Risks for the sector in 2015 are more tilted to the downside with oil price correction. For one, any further oil price volatility would affect the rates at which the projects are being awarded, compounded by the renewed focus by IOC on shorter term shareholders’ returns." - Ms Low Pei Han, Investment analyst at OCBC Investment Research
Credit Crunch and Fund Raising Problems
"The sector faced possibility of credit crunch should short-term outlook deteriorate." - Ms Low Pei Han, Investment analyst at OCBC Investment Research
"Since the valuations of O&M companies have already declined quite drastically in the last 3-4 months, this is likely to make it challenging for O&M companies to raise funds in 2015." - Darren Yeo, Vallianz CEO
Who Will Suffer
- Companies highly indebted with weak balance sheet
- Companies with exploration, development and deep-water projects.
- Shale independent producers
- Deep-water rig owners, seismic survey service providers, large PSV operators and infrastructure fabrication/installation companies.
- Shipyards facing possibility of default and cancellations and low order intake
Who Will Survive
- Companies with strong balance sheet
- Companies with superior business model
- Companies with NOC as clients
- Companies operating at shallow water fields operated in Middle East remain economical due to lower break-even costs
DYODD! This is a powerful word I learnt recently. Hahaha. It refers to Do Your Own Due Diligence. Probability is not certainty!