Regional Oil & Gas

UOBKayhian on 27 Nov 2014

Fund managers were receptive to our views that:
• Asia is cost competitive in oil & gas (O&G) production given that it is a shallow and
midwater exploration & production (E&P) region. In the case of Southeast Asia, the cost
breakeven – in terms of Brent oil price – is US$30-40/bbl.
• Asia’s spending is driven by national oil companies (NOC) instead of international oil
companies (IOC). NOCs’ goal is to maintain/achieve self-sufficiency while IOCs
maximise profits and shareholder returns. Thus, NOCs’ spending is typically more
resilient than that of IOCs. As a whole, Asia accounts for 33% of global oil demand but
only 9% of production.
• Rising cabotage in Asia (and in key oil producer markets around the world) has
changed the competitive landscape. Each cabotage market has its own demand-supply
dynamics than may not mirror the global market.
Stock differentiation has become even more crucial. We continue to advocate a bottomup
strategy that favours companies with: a) an experienced and dynamic management,
b) a resilient business positioned in regional shallow and mid-water depths or a
cabotage market that has high barriers to entry, c) a clearly defined company-driven
growth, d) good profit margins to cushion a potential industry downturn, e) cash calls
that are strategic and EPS-accretive, and f) a healthy ROE. We believe investors will
return to stocks that deliver earnings growth amid lower oil prices.
Singapore: We like stocks that provide relative earnings resilience as well as earnings
growth. Our top picks are: Ezion (EZI SP/Target price: S$2.18), Pacific Radiance
(PACRA SP/ Target price: S$1.57), Triyards (ETL SP/ Target price: S$1.13) and
Sembcorp Industries (SCI SP/ Target price: S$5.80).