News Update In O&G Sector....
SINGAPORE (Dec 2):
UOB Kay Hian has upgraded its rating on Singapore’s oil and gas (O&G) sector to “market weight” for both its offshore marine and shipyard segments, following the Organization of the Petroleum Exporting Countries’ (OPEC) announcement of agreeing to cut oil production.
This deal sets the stage for the oil market to reach an earlier balance in 2017, says analyst Foo Zhiwei in a Friday report.
However, he expects the sector to remain a trading play due to continued oil price volatility in the near term, owing to several factors that could break or cap current price levels of US$50/bbl.
“The ‘price floor’ may be broken if OPEC fails to adhere to the production cuts proposed, of which OPEC is known to have a chequered history with adherence. Oil price upside may also be capped as supply from US shale players kicks in as price rises,” explains Foo.
Critical swing factors include monthly non-OPEC/OPEC production figures; rig/production counts from US shale players; global inventory or demand trends; and the start-up of new projects over the next two years.
“We expect O&G stocks to trade in line with oil price sentiment in the near term,” he adds.
While the analyst notes that fundamentally, the sector environment remains largely unchanged, its recovery in activity is expected to lag oil prices as oil players will require price stability before committing to higher activity levels.
He also believes that asset owners will be the first to benefit from the subsequent uptick in activity.
UOB therefore prefers Ezion for its strong balance sheet and earnings potential from an upturn, as it believes the stock can weather continued depressed service prices. It has also named Sembcorp Industries as its top “buy” pick within the overall sector given its utilities segment’s earnings growth and exposure to oil.
While Ezion has been given a target price of 39 cents, Sembcorp’s price target of $3.05 is currently under review, pending the research house’s valuations review for the Singapore shipyards.
As at 11am, shares of Ezion and Sembcorp are trading 1.40% and 1.04% higher and at 36.5 cents and $2.92 respectively.
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