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Staying away from O&G as portfolio returns hit 5.5%

Kang Wan Chern Published on Fri, Mar 03, 2017 / 9:59 AM GMT+8

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SINGAPORE (March 3): The oil and gas sector surged over the past week after Sembcorp Marine announced a better-than-expected set of numbers for FY2016 ended December. The FTSE ST O&G Index gained 4.3% in the week to Feb 28, outstripping the 0.8% gain in the benchmark Straits Times Index. Shares in SembMarine, meanwhile, were up 25%. Analysts rushed to raise their price targets on SembMarine, only to see them outstripped by strong momentum. Now, there are even suggestions that the entire O&G sector is turning around.

After thinking hard about whether we should add SembMarine — or any other O&G name — to our portfolio, we decided against it. While there is a chance we may miss out on some big gains, we think the risks outweigh the rewards at present.

SembMarine reported earnings of $75 million for FY2016, reversing a loss of almost $300 million in FY2015. This came despite a 28.6% y-o-y drop in revenues to $3.5 billion. The company managed to complete and deliver all its projects scheduled for 2016, albeit at a lower operating profit margin of 6.5%, compared with 10.7% in FY2015. And it revealed it has secured a total of $320 million worth of new orders, all for non-drilling assets. That takes its outstanding order book to $7.8 billion as at Dec 31.