UOB Kay Hian analyst Adrian Loh has maintained his “overweight” rating for the oil and gas sector, with most of Singapore’s oil-related companies performing well in 2021.
A majority of Singapore’s diverse range of oil-related stocks in both upstream and downstream sectors generated strong positive free cash flow in 2021; half of them were in a net cash position as at end-2021, the analyst notes.
He adds that these companies are expected to maintain robust financials this year as oil and gas prices remain high.
Further to his report, Loh points out that the oil and gas sector is “still influential”, it being the “dominant source of our energy needs for the better part of the last 70 years”.
In the past five years, the volatility in oil prices has been “tremendous”, wavering from lows of US$19.33 ($27.19) per barrel to its high of US$127.98 per barrel, he adds.
Notably, oil prices have increased by 37% in 2022 and have been a key contributor to global inflation.
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“Natural gas prices have also increased materially with the US Henry Hub spot price up 48% ytd while the monthly Japan LNG import prices have risen 71% over the January to April 2022 period,” the analyst says.
Looking ahead, Loh expects prices for oil and gas to remain higher.
“Despite the upstream industry having suffered a nine-year period of underinvestment over 2014 to 2021 when capital expenditure (capex) halved, forecasts indicate that the industry is still unwilling to spend, with capex expected to only increase by a compound annual growth rate of (CAGR) of 5% over the 2021 to 2024 period,” he writes.
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“With such anaemic levels of spending, the implication is that oil and gas prices will stay higher for longer,” he adds, noting that crude oil continues to hold significant sway over countries’ geopolitical and economic strategies.
With this theme of higher oil prices, Loh believes that apart from Keppel and Sembcorp Marine (SembMarine), there are 14 other oil price plays in Singapore in the form of small and mid-cap companies totalling just over $2.5 billion in market cap.
“The modern day oil industry is multi-faceted along its value chain, from upstream to downstream, i.e. exploration and production (E&P), offshore marine (O&M), refining, chemicals and pipelines. In Singapore however, only E&P and O&M companies are listed on the SGX with investors having to look internationally for exposure to refining, chemicals and pipeline companies,” he writes.
SGX-listed companies with exposure to the oil and gas sector are Rex International, RH Petrogas and Interra Resources in upstream E&P, China Aviation in the midstream and Kim Heng, ASL Marine, Baker Technology, CH Offshore, Dyna-Mac, Marco Polo Marine, Penguin International, Atlantic Navigation, Civimec and CSE Global in the downstream.
“These 14 small and mid-cap companies are largely in the downstream and offshore marine space with only three E&P companies. While E&P companies directly benefit from higher oil and gas prices, O&M companies only benefit when higher levels of activity and capex flow through from the upstream companies,” says Loh.
Notably, half of these companies were debt free as at end-FY2021 and a majority of them generated double-digit free cash flow yields in FY2021, suggesting that some capex has been flowing into Singapore’s O&M companies in 2021 and ytd, according to the analyst.
Loh also points out that OPEC’s spare capacity, which allows the world to respond to price shocks caused by events that endanger oil supply, is forecasted to be low.
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OPEC stands for the Organization of the Petroleum Exporting Countries.
“With the US Energy Information Administration forecasting OPEC’s spare capacity to remain low at 2.75 to 3.0 million barrels over the 2Q2022 to 4Q2023 period, we believe that oil prices will remain high given the tight physical market,” he writes.
A caveat to this forecast is the event of a global recession, such as one triggered by the US Fed raising interest rates aggressively in an effort to combat inflation, leading to a deterioration in oil and gas demand and lowering prices as a result.
