Geopolitical tensions keep oil prices elevated; 3 O&G Companies to benefit from this
21 Nov 2023
The global Oil and Gas (O&G) industry has witnessed significant ups and downs in recent years. From the rise of renewable energy to the unrelenting impact of geopolitical tensions, the industry landscape is in a state of constant flux.
As we delve into the year 2023, it’s imperative to review the pivotal developments that have shaped the O&G sector and explore the implications for investors and stakeholders.
Shakeup in the Oil and Gas Industry
The O&G industry remains susceptible to market volatility, driven by factors such as supply disruptions caused by the COVID-19 pandemic and subsequent geopolitical tensions that resulted in huge price swings.
For instance, the West Texas Intermediate (WTI) crude oil futures’ price plummeted to a negative value for the first time on April 2020 as the COVID-19 pandemic spurred lockdowns all over the world.
However, the Russia-Ukraine conflict and subsequent events led to a rapid rebound in WTI crude oil futures’ price which hit a peak of US$139.13 per barrel on March 2022, the highest price since July 2008.
On top of that, the outbreak of the Israel-Hamas war has sent tremors through oil markets and stopped a decline in the oil prices triggered by a slowdown in the global economy.
The World Bank predicts that oil prices could skyrocket to a record high of US$150 if the ongoing conflict escalated into a scenario like that of the Arab oil embargo in 1973
Although nobody can pre-determine the state of the O&G industry, market analysts expect oil and gas prices to remain elevated at current levels for the rest of the year and into 2024 at the time of writing this article.
3 O&G Stocks to Benefit
With that in mind, let’s take a quick look at 3 Singapore-listed stocks that stand to benefit in the tight global oil market.
1. Sinostar Pec
Sinostar Pec is a leading provider of services and solutions to the petrochemical and chemical industries in China. The key products of the company are Processed LPG, Propylene, Purified Isobutylene, Hydrogen, Methyl Tert-butyl Ether (MTBE), Polypropylene and Logistics and Transport.
For the 9 months ended September 2023, the Group delivered a decent 8.5% y-o-y growth in revenue to RMB3.77 billion.
On a brighter note, it recorded a net profit of RMB282.99 million in 9M2023, an increase of 313% compared to RMB68.51 million in 9M2022, underpinned by higher output and lower raw material costs.
The management remains upbeat on the stock’s prospects and commented:
“The Group’s business is driven by global economic recovery, demand growth, and rising crude oil prices. Barring unforeseen circumstances, the Group expects supply-demand dynamics to continue to improve. The board of directors remains optimistic about the Group’s long-term development.”
Based on a share price of S$0.15, Sinostar PEC trades at a modest 0.4x Price-to-Book ratio.
Dyna-Mac is an offshore solutions provider, offering services to the oil and gas, marine, and petrochemical industries. The company is involved in the fabrication of topside modules for floating production storage and offloading (FPSO) vessels.
It provides engineering, fabrication, and construction of offshore FPSO and FSO (floating storage offloading) topside modules as well as onshore plants and other sub-sea products for the oil and gas industries.
For the 6 months ended June 2023, the Group reported revenue of S$182.3 million, up 47.0% compared to the previous year.
Net profit came in line, jumping over 200% from S$3.2 million in 1H2022 to S$10.2 million in 1H2023, attributable to better utilisation of capacity by intensifying land use, improved productivity and tighter cost controls.
On top of that, the firm has been securing new contracts aggressively, expanding its order book to S$630.7 million, with project delivery stretching into 2025.
The increase in orderbook is in line with the expected 8.0% CAGR growth of the FPSO market from US$11.91 billion in 2021 US$21.83 billion by 2028. This is being driven
by significant demand in nations like Brazil, Mexico and Guyana, as well as exploration hotspots like Namibia’s Orange Basin and the East Mediterranean.
Drydocks World CEO Rado Antolovic has said he sees
a strong pipeline for FPSOs and FSRUs for the next 5 to 10 years as the market pays more attention to offshore exploration and production operations, as well as rising deep- and ultra-deepwater exploration.
On this note, Dyna-Mac remains encouraged by the strong level of inquiries received for projects in both Singapore and China, indicating promising opportunities on the horizon. Dyna-Mac last closed at S$0.295, translating into a 15x P/E ratio.
Seatrium (formerly known as Sembcorp Marine) is a leading global marine and offshore engineering group with a track record of about 60 years. The company specialises in ship repair, shipbuilding, ship conversion, rig building, and offshore engineering and construction.
As seen from the picture above, Seatrium has achieved many commendable feats, such as delivering Singapore’s 1st LNG Bunkering Vessel and the World’s 1st Zero Emissions Ferry.
A buoyant O&G industry has also bolstered Seatrium’s orderbook – currently standing at a strong S$17.7 billion, comprising 33 projects with delivery schedules up to 2030.
Supported by a robust order backlog, the company’s revenue for 1H2023 jumped 160% to S$2.9 billion from a year ago, recording a notable increase of 164% from same period last year. It also registered positive EBITDA (before provision for contracts & merger expenses) of S$258 million for the same period, compared to negative EBITDA of S$19 million in 1H2022.
It is noteworthy that Seatrium has improved on its sprawling debt with net gearing coming in 0.17x as at 1H2023 vs 0.26x as at end Dec 2022.
Given that Seatrium is still reporting losses, we will take the valuation from a P/B point of view. Seatrium last traded at S$0.109 with a 0.9x P/B ratio.
While the world continues to grapple with heightened geopolitical tensions like the Russia-Ukraine conflict and Israel-Hamas war, higher oil prices will give a boost to the overall Oil & Gas sector.
Hence, the 3 stocks mentioned above: Sinostar Pec, Dyna-Mac, and Seatrium are likely to enjoy better margins and ride on the tailwinds of this O&G upcycle even as the industry adapts to the evolving energy landscape.