Compiled by Jamie Lee
OIL-AND-GAS | NEUTRAL
OCBC Investment Research, Nov 30
This year saw a gathering of momentum in debt restructuring and company defaults in the sector. Currently, many companies are now trading at about 0.5 times book or lower, with a few exceptions.
At current levels, however, we believe that most of the negatives have been priced in, and downside risk is now less than a year before - the challenge lies in 1) picking companies with the ability to ride the downturn; and 2) identifying the inflection point in which a sustainable recovery would begin. As such, it is not surprising to see distressed funds being set up to scoop some bargains when the time is right.
When, then, is the right time? There are different sub-sectors in the broader oil and gas industry, and when you recover depends on where you are on the value chain.
Our sense is that should there be a sustained recovery in oil prices, exploration and production companies stand to benefit first as they are regarded as more direct proxies of the oil price.
The drillers and vessel charterers could then be next in line, as well as the service providers.
Asset fabricators (the yards), that depend on new order flows, could take a longer time to see earnings recovery, as their clients first have to regain confidence in the market before ordering new assets from them.
Meanwhile, the downstream players are still doing relatively well amid the doom and gloom in the broader industry.
EZION HOLDINGS | BUY
TARGET PRICE: $0.42
NOV 22 CLOSE: $0.34
Maybank Kim Eng Research, Nov 30
Investors appeared to be looking for reasons to build exposure to the oil-service sector. Unsurprisingly, their concerns revolved around: 1) whether the worst is over; 2) asset-write-down potential; 3) balance-sheet sustainability; and 4) cashflows. We continue to believe that Ezion will be an early beneficiary in the oil cycle, after oil producers.
While the sector is still struggling, Ezion observed that its clients are now clearer on their extraction and production road maps. This helps Ezion tailor its assets to suit their requirements, raising the sustainability of future asset deployment. Ezion has mapped out three paths for itself to navigate the downturn.
It will: 1) continue to diversify into windfarm installation; 2) convert assets to mobile offshore production units to serve clients' longer-term extraction needs; and 3) review its capex to ensure value addition. It also highlighted plans by the Singapore Government to provide financial aid to oil and gas companies.
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