OCBC on 6 Mar 2013
Similar to 3Q12, companies in the sector reported 4Q12 earnings that were mostly in line, save for a few such as Ezra Holdings and STX OSV (both below expectations). Stocks in the oil and gas sector have performed well YTD, especially the small to mid cap firms. However, we note that many are still trading at or slightly above mid-cycle valuations, suggesting that multiples are not overly stretched as long as the economic recovery remains intact. Recovering earnings, sustainable earnings growth and continued contract wins for a select few are expected to be the main drivers ahead. Though we have an OVERWEIGHT rating on the oil and gas sector, investors are advised to be selective. We favour companies with earnings growth or sustainability backed by a strong order book and a positive outlook for their industry sub-segment. As such, our preferred picks are Ezion Holdings [BUY, FV: S$2.33], ASL Marine [BUY, FV: S$0.86], Keppel Corporation [BUY, FV: S$12.68] and Sembcorp Marine [BUY, FV: S$5.84].
Earnings mostly in line
Similar to 3Q12, companies in the sector reported 4Q12 earnings that were mostly in line, save for a few such as Ezra Holdings and STX OSV (both below expectations). However, unlike 3Q12, there were none under our coverage that reported earnings that were above our expectations or those of the street, signaling that more companies may find it harder to beat the street’s higher expectations.
Mid-cycle valuations – multiples are not stretched
Stocks in the oil and gas sector have performed well YTD, especially the small to mid cap firms. However, we note that many are still trading at or slightly above mid-cycle valuations, suggesting that multiples are not overly stretched as long as the economic recovery remains intact. Recovering earnings, sustainable earnings growth and continued contract wins for a select few are expected to be the main drivers for good stock performance ahead.
Recovery in OSV market continues
Offshore support vessel (OSV)-to-rig ratios have been trending down, and we expect this to continue, with a gradual recovery in OSV utilisation levels and charter rates after a situation of overbuilding in previous years. The growth of the offshore drilling market and increasing base of production infrastructure underpins potential increases in OSV newbuilds. Meanwhile, we favour companies with young vessel fleets, given a progressive trend towards bifurcation in the OSV fleet.
How to position one’s holdings
Valuations for most stocks in the oil and gas sector are undemanding, in our view. Though we have an OVERWEIGHT rating on the oil and gas sector, investors are advised to be selective, and to understand the demand and supply dynamics of each sub-segment in the sector. We favour companies with earnings growth or sustainability backed by a strong order book and a positive outlook for their industry sub-segment. As such, our preferred picks are Ezion Holdings [BUY, FV: S$2.33], ASL Marine [BUY, FV: S$0.86], Keppel Corporation [BUY, FV: S$12.68] and Sembcorp Marine [BUY, FV: S$5.84].
Similar to 3Q12, companies in the sector reported 4Q12 earnings that were mostly in line, save for a few such as Ezra Holdings and STX OSV (both below expectations). However, unlike 3Q12, there were none under our coverage that reported earnings that were above our expectations or those of the street, signaling that more companies may find it harder to beat the street’s higher expectations.
Mid-cycle valuations – multiples are not stretched
Stocks in the oil and gas sector have performed well YTD, especially the small to mid cap firms. However, we note that many are still trading at or slightly above mid-cycle valuations, suggesting that multiples are not overly stretched as long as the economic recovery remains intact. Recovering earnings, sustainable earnings growth and continued contract wins for a select few are expected to be the main drivers for good stock performance ahead.
Recovery in OSV market continues
Offshore support vessel (OSV)-to-rig ratios have been trending down, and we expect this to continue, with a gradual recovery in OSV utilisation levels and charter rates after a situation of overbuilding in previous years. The growth of the offshore drilling market and increasing base of production infrastructure underpins potential increases in OSV newbuilds. Meanwhile, we favour companies with young vessel fleets, given a progressive trend towards bifurcation in the OSV fleet.
How to position one’s holdings
Valuations for most stocks in the oil and gas sector are undemanding, in our view. Though we have an OVERWEIGHT rating on the oil and gas sector, investors are advised to be selective, and to understand the demand and supply dynamics of each sub-segment in the sector. We favour companies with earnings growth or sustainability backed by a strong order book and a positive outlook for their industry sub-segment. As such, our preferred picks are Ezion Holdings [BUY, FV: S$2.33], ASL Marine [BUY, FV: S$0.86], Keppel Corporation [BUY, FV: S$12.68] and Sembcorp Marine [BUY, FV: S$5.84].
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