Time for bargain hunting with nascent oil rally?

Time for bargain hunting with nascent oil rally?
From Iraqi oil refineries (above) to local maritime and offshore companies, the oil price upheaval had hit them all.
PHOTO: Reuters

It has been a year of closures, corruption and chaos for the oil industry.

On Monday, Brazilian oil and logistics tycoon Eike Batist surrendered to police after four days of hiding.

The former billionaire, once the richest man in Brazil, was wanted by the authorities following a sweeping investigation into corruption at Petrobras, Brazil's state-owned oil company.

Singapore-based companies Keppel Corp and its rival Sembcorp Marine, which are the world's two biggest oil rig builders, have not been spared.

In 2015, both companies faced graft probes, which they strongly denied, over their contracts in Brazil.

But in a filing with the Singapore Exchange (SGX) last October, Keppel recognised that "certain transactions" associated with the company's former agent in Brazil "may be suspicious" following internal investigations.

That was not the only scandal that hit Singapore's oil and gas sector, which is dominated by shipyards and offshore supply vessels.

Last July, Swiber Holdings, a Singapore-based supplier to offshore oil and gas explorers, became the first major fatality of the oil price slump when it announced plans to wind down.

In November, the Commercial Affairs Department (CAD) contacted Swiber over a probe into an offence under the Securities and Futures Act (SFA).

CAD did not reveal further details on the investigation, but experts told The Business Times that SFA offences could include false or misleading statements, failure to make continuous disclosure and insider trading, among others.

The oil and gas industry's troubles have also affected the earnings of local banks.

Singapore's three largest banks recorded lower profits in the first nine months last year after having to pay massive allowances to cover potentially bad loans, mostly involving the oil and gas industry, reported The Straits Times on Tuesday.

For instance, DBS, Swiber's lender, saw its allowances jump 96 per cent to $972 million, due partly to the firm's implosion.

But the beleaguered industry could now find some relief with rising crude oil prices.

In a briefing last Monday, SGX market strategist Geoff Howie told the media that the SGX maritime and offshore services index has rallied 21 per cent off its trough in September last year.

This is an indication that the sector has reached its low point and could be in the early stages of an upward trend.

And this could also mean bargains for investors.

Mr Howie noted that despite the rally in oil prices, most stocks in the sector are still trading at trough valuations, which are even lower than levels during the last global financial crisis.

The resuscitation of the industry is in tandem with the recovery of crude oil price, which is now consistently above US$50 (S$70.60) a barrel.

At its peak, oil prices reached a historic high of US$147 a barrel in July 2008 before tumbling to US$25 last January.

Photo: SGX, TNP graphics

Mr Howie also noted that upstream companies, such as those involved in oil exploration and production as well as asset owners, are likely to benefit more before those in downstream industries such as shipyard owners and shipbuilders.

The three biggest names in the maritime and offshore services sector on the SGX mainboard are Sembcorp (which has two listings, Sembcorp Marine and Sembcorp Industries), Keppel and Ezion Holdings, which make up nearly 45 per cent of the sector's index weight. (See graphics above.)

In a market report on Jan 31, OCBC analyst Low Pei Han said that Sembcorp Industries' stock is up 12 per cent year to date, compared to the Straits Times Index's 6 per cent appreciation over the same period.

Ms Low is also positive about the company's long-term prospects, noting its investment in China over two decades, with a presence spanning 15 provincial regions.

She said: "Post Keppel's FY16 results, which saw significant impairments, there could be a dampening of sentiment on oil-related plays, barring positive surprises in the oil price.

"We maintain our buy rating on a longer term basis, with dips presenting opportunities to accumulate."

In comparison, Keppel had a "hold" rating from Ms Low in a market report on Jan 27.

It was a good year for its non-oil related businesses that will continue to "buttress" the firm, noted Ms Low.

Keppel's property division, which sold homes in China, Vietnam and Singapore, saw a net profit of $620 million last year.

But there were downsides.

Besides the firm's underperforming 4Q16 results, Ms Low also noted the firm's "impairment" with the closing down of its overseas yards in Bintan and Brazil and the impending closure of three more yards in Singapore.

linheng@sph.com.sg


This article was first published on Feb 2, 2017.
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