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An Update On Oil And Gas, Are There Still Opportunities?
At the start of the year, I wrote about the prospects of the oil and gas industry with a perspective on Singapore. Much has happened since then, in particular oil prices have slumped since the last time I wrote about it (14 February 2013).
Source: FactSet, graph of Brent Crude Oil prices from February 2013 to date
Prior to the slump, the oil and gas industry made robust capital expenditures in automation on the back of continued strong demand as well as record high oil prices. Since then, demand has been reined in by the gloomy economic outlook. Despite this, the oil and gas industry still enjoys a favourable investment environment.
In particular, the upstream oil and gas industry (includes exploration, production and pipelines) continues to see strong project activity. Expenditures by these players are expected to grow at a compounded annual growth rate of nearly 8 percent over the next five years, according to ARC Advisory, a leading market research and advisory firm.
Singapore’s Oil And Gas Industry
Singapore’s oil and gas industry has felt the repercussions of the slump in oil prices. Since the fall in oil prices in February, oil and gas counters have begun to trace and ultimately lag behind the performance of the Straits Times Index.
Source: FactSet, graph comparing returns of the STI (Blue) and FTSE Oil and Gas (Yellow)
With the underperformance so far, is it time to buy into oil and gas counters? According to OCBC Investment Research, valuations across most stocks in the oil and gas sector are “undemanding”. The research goes on to advise investors to be selective as different oil and gas companies might have markedly different fates. Sampling over the universe of oil and gas counters listed on the Singapore Exchange, this is evidently so.
Ezion, Jaya and Marco Polo, Three Markedly Different Fates?
In my previous oil and gas article, I drew attention to three different counters which had been faring relatively well in the stock market at that time. These three counters are Ezion Holdings, Jaya Holdings and Marco Polo Marine. It would appear that Mother Fate had different plans for all three of them after that period in which I briefly introduced them. Below is a graph of how different their fates have been so far.
Source: FactSet, graph comparing returns of Ezion (Blue), Marco Polo (Pink) and Jaya (Yellow)
Ezion – Firing On All Barrels
Ezion reported a stellar 1Q13 financial report card. Revenue grew about 79 percent while net profit jumped up over 3 fold to US$46.2 million.
Analysts at DBS Vickers note that most of Ezion’s projects are on track for completion (with the exception of its Myanmar project). In addition, new projects are already in the pipeline even as Ezion remains supported by strong operating cash flows and balance sheet.
Notwithstanding its stellar share price performance, most analysts see further room for stock price appreciation. This can be noted from the table of brokers’ recommendations below.
Source: FactSet, table on Ezion’s brokers’ recommendation
Marco Polo – Gateway To Indonesia’s Oil and Gas
Ever since Marco Polo Marine’s Indonesian subsidiary, PT Pelayaran Nasional Bina Buana Raya (BBR) listed on the Indonesian stock exchange, it has been marketing itself as a proxy to the Indonesian offshore sector. Indonesia is expected to open up certain parts of offshore Indonesia to oil plot tenders. This is expected to generate increased demand for vessels in which BBR specialises in constructing.
On its ship chartering front, Marco Polo continues to see high utilisation rates of its entire fleet. Moving forward, Marco Polo expects its offshore division to be its main driver of growth as it plans to increase its offshore support vessel fleet over time.
Although the long-term future of the counter looks to be bright, the company will require time before it recognises significant revenue growth. Because of this, investors might consider not getting their hands wet with this one but to wait and see how expansion plans figure in the overall scheme of things.
Jaya Holdings – Disappointing Contract Wins
Recently, Jaya Holdings announced charter contracts worth about US$61.3 million. The charter contracts are fixed for three years and although provides earnings visibility, the rates are usually lower-than-expected.
According to DMG Research however, the contract wins have already been factored into the market. The returns on these wins are also low, at under 9 percent. They also note that Jaya has had delays in vessel deliveries. This could in turn hurt growth prospects as well as business reputation.
Choosing The Right Oil And Gas Counter
While valuations might appear to be undemanding, investors would do well to pick and choose which counter they want to invest in.
This is particularly so for oil and gas counters in Singapore as most counters operate in different sub-sectors of the industry. An understanding of these sub-sectors is crucial when selecting the right counter. This could take the form of the demand and supply dynamics of that particular market.
Preferably, investors should always stick to counters which boast solid earnings growth or a strong order book as well as a positive outlook for their sub-sector.
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