YTD, the FTSE Oil and Gas index has generally tracked the broader market, though there have been instances of a divergence in performance. Besides the exploration and production segment garnering more investor interest, we are increasingly positive on the OSV segment, while prospects of the rig market remain bright, underpinned by the sustained high oil price environment. Still, the relatively high-beta O&G sector is very much sensitive to macroeconomic events. The possibility of increasing capital flows from Asia to the US remains, and investors may want to look beyond the short term volatility and focus on the positive longer-term growth prospects of the sector. Maintain Overweight with a one-year horizon, with Ezion Holdings [BUY, FV: S$2.90], Keppel Corp [BUY, FV: S$12.53] and Sembcorp Marine [BUY, FV: S$5.64] as our preferred picks. For investors seeking less volatility in terms of earnings but with O&G exposure, Sembcorp Industries [BUY, FV: S$6.48] is a worthy candidate.
Broader sector in-line with divergent individual stock performance
In the latest results season, companies in the sector reported mostly in-line results, with some disappointing the market. The exploration and production (E&P) sector has garnered more investor interest, but it is imperative that the companies deliver in terms of value to shareholders going forward, or the interest in this sub-sector may start to dwindle.
Increasingly positive on the OSV segment; rig market remains strong
Looking ahead, we are increasingly positive on the offshore support vessel segment, which has seen improving charter rates and vessel utilisation levels. The rig market remains strong in terms of demand for high spec rigs, as reflected by the firm day rates and healthy enquiry levels. Activity in the sector as a whole will be underpinned by the sustained high oil price environment.
Volatility due to macroeconomic events; focus on longer-term prospects
Despite robust industry fundamentals, the relatively high-beta oil and gas sector is very much sensitive to macroeconomic news. As a cyclical sector, it also remains vulnerable to concerns of a recession or liquidity squeezes. However, the sector would also be among the first to benefit should there be clearer signs of the global economy finding its footing. The possibility of increasing capital flows away from Asia to the US remains a concern and investors may want to look beyond short term volatility and focus on the positive longer-term growth prospects of the oil and gas sector. Maintain Overweight with a one-year horizon.
Preferred picks
We look for companies with promising earnings growth and visibility, and sufficient financial strength to weather near term headwinds, given the still-fragile state of the global economy. These would include Ezion Holdings [BUY, FV: S$2.90], Keppel Corp [BUY, FV: S$12.53] and Sembcorp Marine [BUY, FV: S$5.64]. For investors seeking less volatility in terms of earnings but with exposure to the oil and gas sector, Sembcorp Industries [BUY, FV: S$6.48] would be a worthy candidate.
In the latest results season, companies in the sector reported mostly in-line results, with some disappointing the market. The exploration and production (E&P) sector has garnered more investor interest, but it is imperative that the companies deliver in terms of value to shareholders going forward, or the interest in this sub-sector may start to dwindle.
Increasingly positive on the OSV segment; rig market remains strong
Looking ahead, we are increasingly positive on the offshore support vessel segment, which has seen improving charter rates and vessel utilisation levels. The rig market remains strong in terms of demand for high spec rigs, as reflected by the firm day rates and healthy enquiry levels. Activity in the sector as a whole will be underpinned by the sustained high oil price environment.
Volatility due to macroeconomic events; focus on longer-term prospects
Despite robust industry fundamentals, the relatively high-beta oil and gas sector is very much sensitive to macroeconomic news. As a cyclical sector, it also remains vulnerable to concerns of a recession or liquidity squeezes. However, the sector would also be among the first to benefit should there be clearer signs of the global economy finding its footing. The possibility of increasing capital flows away from Asia to the US remains a concern and investors may want to look beyond short term volatility and focus on the positive longer-term growth prospects of the oil and gas sector. Maintain Overweight with a one-year horizon.
Preferred picks
We look for companies with promising earnings growth and visibility, and sufficient financial strength to weather near term headwinds, given the still-fragile state of the global economy. These would include Ezion Holdings [BUY, FV: S$2.90], Keppel Corp [BUY, FV: S$12.53] and Sembcorp Marine [BUY, FV: S$5.64]. For investors seeking less volatility in terms of earnings but with exposure to the oil and gas sector, Sembcorp Industries [BUY, FV: S$6.48] would be a worthy candidate.
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