Excerpts from analyst's report

KGI Fraser analyst: Joel Ng

♦ Key Takeaways
namcheong build9.14Nam Cheong builds offshore support vessels. Photo: Company Upgrade Pacific Radiance to BUY   

 Upgrade Nam Cheong to BUY

 Blue chips: accumulate Keppel Corp at S$5

 Oil price at US$50‐60 by end 2016/early 2017 on improving supply/demand dynamics, in our view.

 We expect earnings to be weak in 2016 but have a more positive view on industry upside rerating catalyst from higher oil prices

 Risk/reward ratio now more favorable as companies trade at trough valuations and as oil prices bottomed out in 1Q16

 

Nam Cheong
Share price: 
8 c
Target: 
11 c

We turn positive on the O&G industry as we believe that oil prices have bottomed out based on improving oil supply/demand dynamics. Although we still expect companies in the sector to report declining earnings in 2016, the stabilization of oil prices around the US$50-60 range may incentivize oil majors to begin ramping capex in 2017 to replenish dwindling reserves. We expect this to trigger an upward rerating for the sector.  

Pacific Radiance
Share price: 
29 c
Target: 
40 c

Time to accumulate on attractive risk/reward ratio. We have been bearish on the sector since 1Q15 but now with improving fundamentals, we believe stock valuations have bottomed. It is the time to accumulate quality oil companies, those that are trading at their 10-15 year lows. 

Oil prices have stabilized above US$40 recently despite the failure of the Doha talks in April 2016. We think the resilience shows that supply/demand dynamics has improved compared to late 2014 and early 2016, and could lead to a sustained recovery >US$50 by as early as 3Q16.

♦ Strategy for 2016
joelng4.14"First priority is to accumulate those (stocks) that are trading at trough valuations yet with good visibility and healthy balance sheet like Triyards Holding (BUY TP $0.55).

"Other stocks whose valuations are also at multi-year lows but can survive this downturn include Pacific Radiance (BUY TP $0.40) and Nam Cheong (BUY TP $0.11). For the blue chips, entry price for Keppel Corp (HOLD TP $5.60) is around the S$5 levels."


-- Joel Ng (photo)

Capex cuts are unsustainable, leading to oil supply problems beyond 2017.  The O&G industry has been cutting capex for two years consecutively. The last time the industry had this many cuts was in the 1980s. Current E&P capex is expected to decline 10-15% in 2016 after declining 23% in 2015, according to data by Bloomberg Intelligence.

However, 41% of the global drop in capex may be attributed to cuts in the US. Global E&P spending of <US$500bn are unsustainable as it may not be sufficient to replace existing production and accommodate for future growth in demand.

Upside catalysts and key risks. Upside catalysts include a sustained oil price above US$50 in 3Q16 and supply disruptions that may easily tilt the oil markets into deficit. For example, the recent strike in Kuwait cut the country’s output by around 1.7 mb/d, which could have easily balanced the current oversupply of 1.5-2 mb/d.

Furthermore, unscheduled supply outages in Nigeria, Ghana and Canada, and the ability of Venezuela to sustain production levels are adding to the list of supply side problems.

Key downside risk includes oil price staying lower for longer as high cost producers (e.g., US Shale, Deepwater) remain resilient and as oil companies cut capex further in 2017.

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