Some mid-cap O&G plays having better times than peers on SGX
WHILE elevated oil prices over the first half of this year have galvanised mid-cap stocks in the oil, offshore services, and shipping sectors, their performances have been uneven. Persistent tight supply in the oil market coupled with robust demand will likely see some favourite plays continue to shine for the rest of the year, notwithstanding looming recessionary pressures and potential oil output hikes.
One stand-out performer is Dyna-Mac — a mainboard-listed company that designs and constructs modules for the offshore oil and gas (O&G) industry and counts conglomerate Keppel Corp as its second-largest shareholder with a 24 per cent stake. The stock’s total return was 136 per cent over the first half of the year.
Dyna-Mac said in May that it snagged a S$180 million job from a longtime repeat customer to build topside modules for a floating production storage and offloading (FPSO) vessel. While in and by itself this is good news, more significantly the latest contract bumps up Dyna-Mac’s order book to a record high of S$641 million.
This represents 3 years of revenue based on FY2021 numbers, pointed out UOB Kay Hian (UOBKH) in a recent report, referring to the company as an “overlooked” beneficiary of the O&G capex cycle. Indeed, Dyna-Mac is a beneficiary of high oil prices as upstream oil players ramp up production, leading to a pickup in activity in the FPSO market. The company seems to have put its FY2020 red ink behind it, having swung back to the black in FY2021 and remained so in Q1 2022.
It is quite possible, however, that the most anticipatory happening is the expectation of a probable divestment by Keppel of its stake in Dyna-Mac. “In the medium term, we expect Keppel to sell its non-core stake in Dyna-Mac,” said UOBKH in a June report.
O&G stocks have been all the rage this year on the back of sky-high oil prices. The average price of Brent, the global crude benchmark, in June stood at US$122.71 per barrel. That is nearly 70 per cent higher than a year ago. The US crude benchmark, West Texas Intermediate (WTI), has surged 61 per cent to an average of US$114.84 in June from a year ago.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Russia’s invasion of Ukraine and the resultant sanctions against Moscow by the West have led to the tightest market conditions for the commodity, which in turn has led to soaring inflation.
Singapore’s mainboard-listed container shipping company Samudera Shipping Line (SSL) pulled significant trading activity in the first 6 months of this year. Optimism over the reopening theme post-pandemic curbs in the region and higher freight rates led by the duo of strong demand and supply chain disruptions have rewarded the company, which provides shipping services for oil, chemical, gas, liquefied products, as well as dry bulk transportation across the region.
Among the most actively traded counters on the Singapore Exchange (SGX), SSL showed up as one of the top 20 stocks to have drawn the highest net institutional inflows proportionate to market capitalisation over the year-to-mid-June period, according to data provided by SGX My Gateway.
In April, SSL bought an Indian flagged tanker for US$12.5 million to expand its fleet of vessels. This follows a decision last year by the shipping company to re-enter the tanker business. It also acquired an Indonesian warehousing and distribution company for US$9.5 million cash to expand its offering in the supply chain management of production goods and finished goods, at a time when supply chain woes are aplenty.
But there are headwinds to watch out for as the prolonged Russia-Ukraine war pushes bunker prices higher and cranks up operating costs, while a slowing economy worldwide could hurt demand.
SGX’s favourite oil plays, Rex International and RH Petrogas, fared rather variedly from one another in the first half. While RH Petrogas stock returned 44 per cent, Rex International posted a negative return.
Shares of Rex International hit a year’s high of S$0.48 in March as oil prices hit the roof on sanctions on Russian oil, but have since come off by half to S$0.24 on Thursday (Jul 7). In 2021, the company had a record-breaking year, not least owing to its transfer to SGX’s mainboard last March, which saw the stock rally by 109 per cent versus 20 to 25 per cent gains across O&G stocks globally, as pointed out by SGX’s market strategist Geoff Howie.
According to Phillip Securities remisier Joey Choy, Rex International’s share price generally tends to be more volatile than that of RH Petrogas. He sees more weakness ahead, as Rex International’s counter has broken the S$0.25 support level that it has held since October last year.
Even as most pundits expect oil prices to remain high, there are serious headwinds. As central banks hike rates to tamp down inflation and worries heighten over a slowing global economy and recessionary woes, the exuberance in oil prices has faded somewhat.
Expectations that a slowdown could hurt oil demand has led to a sharp correction in crude prices, with Brent having fallen from an intraday high of over US$120 per barrel on Jun 29 to a low of under US$100 per barrel on Thursday. This reflects softening sentiment as fears of a recession grow rather than fundamental changes in the physical market, said Stephen Innes of SPI Asset Management.
Moreover, more downward pressure for oil looms as supply in the market is set to improve with the oil cartel Opec (Organization of the Petroleum Exporting Countries) having committed to phase out production cuts and hike output in both July and August this year.
These risk factors for oil bulls could partly explain the correction in many of these mid-cap counters in recent weeks.
Copyright SPH Media. All rights reserved.
