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Top Oil And Gas Picks Amidst Iraqi Turmoil
Last week, we saw that the insurgency situation in Iraq worsen as an Al Qaeda linked militia began taking over cities. They have managed to pushed government forces out of Mosul, the country’s second largest city and are closing into the nation’s capital.
This has added further troubles to the distressed central government with the Shiites, Sunnis and Kurds fighting over control of the government and oil fields. Oil prices have shot up due to the insurgency in the world’s fifth largest oil exporter.
Prices of brent crude oil reached a 10-month high of $114 per barrel and appears to be heading further north as tensions escalate in the Middle Eastern theatre.
In addition, analysts from various research houses felt that the STI has reached a peak after the recent rally. The STI is facing a downtrend in its earnings causing the index to be trading at an estimated 14 times of its 2015 forward P/E.
The fundamentals of the oil & gas sector remain intact and growth in global drilling fleet is expected to underpin positive prospect for offshore players.
There is a huge amount of potential in companies providing offshore support vessels and subsea services. Among these, we will prefer companies with niche and overseas exposure.
Companies involved in deepwater drill rigs will be avoided as a slower capex (capital expenditure) was reported by major oil companies globally. Projects with higher costs such as deepwater drill rig will probably be shelved as budgets shrink.
Our picks for oil and gas exposure are as follows:
Vard Holdings
Vard boasts a portfolio of proprietary OSV designs that are popular with the industry.
It is coming out of recent troubles at its Brazilian yards and could present much value to investors at currently depressed prices.
According to our estimates, Vard’s total order book value stands at NOK$34.3 billion (est. $7 billion).
Ezion Holdings
Ezion is the owner of numerous liftboats which are popular with oil companies as these vessels boost cost-efficiency.
The company intends to venture into the Exploration and Production sector of the Oil and Gas industry with an RTO of JK Tech.
Such a deal could transform Ezion into a major player with exposure to both up and midstream sectors of the oil and gas industry.
Pacific Radiance
PACRA owns OSVs and provides subsea services and marine equipments around the world. Importantly, it controls 60 Indonesian flagged vessels.
Indonesia maintains high barriers to entry due to laws that prevent foreign competition in downstream oil and gas activities.
PACRA’s businesses are well diversified geographically. Revenue is derived from Asia (58 percent), Africa (18 percent) and Australia (15 percent).
*With additional input from Simeon Ang.
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