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Singapore oil & gas sector may rebound later in 2015
JUST as the oil crash surprise defined 2014, it could set the stage for 2015, with analysts eyeing the beaten-down oil and gas sector in Singapore as the biggest buying opportunity (see infographic).
Other than the usual yield stocks such as SingTel and ComfortDelGro, names of blue chip rigbuilders Keppel Corp and Sembcorp Marine are bandied around, along with service providers Ezion Holdings and Nam Cheong.
At the end of the half-day trading session on Dec 31, the total value of 770 companies listed on Singapore Exchange (SGX) tracked by The Business Times was S$957 billion, up 6.5 per cent from S$899 billion at the end of 2013. Net gains were driven by movements among the biggest stocks.
The benchmark Straits Times Index (STI) closed at 3,365.15 points, up 6.2 per cent from 3,167.43 points at end-2013. The increase was mainly due to takeover activity, analysts said.
Officially, on oil and gas, many analysts are not putting out "buy" calls. Some expect things to get worse before they get better. Others bemoan how difficult it is to get clients even remotely interested in the sector in the midst of the oil price slump.
However, a number have expressed hopes to The Business Times that the sector will see a rebound when oil prices recover, possibly in the second half of 2015.
What will determine oil prices and overall market sentiment is the all-powerful US economy, which surged an estimated 5 per cent in the third quarter while major economies such as Europe and Japan remain in a funk.
"The biggest gamechanger here is the US. The US is still the biggest supplier, the biggest consumer of oil. It all hinges on the US economy," UBS Wealth Management regional chief investment officer Kelvin Tay told BT.
Yet, hope and fear are deeply entwined. "If the US economy collapses next year, oil prices will come off very sharply. But indications are that (the economy) is going to be maintained," he said.
The offshore marine sector in Singapore is "quite discounted" if one expects the US benchmark West Texas Intermediate (WTI) crude oil to recover to US$65 a barrel from below US$55 now, Mr Tay said.
DMG & Partners head of research Terence Wong said in a phone interview that he sees potential in oil and gas and property stocks. Ezion owns the largest fleet of liftboats in the region, used to repair rigs. It has signed long-term contracts of several years with national oil companies, he said.
Property stocks such as Keppel Land and CapitaLand are also a buying opportunity, he said, given that they are trading at about a 40 per cent discount to their revised net asset values (RNAV). RNAV refers to analyst estimates of how much a company's property portfolio is worth.
Some cite political factors as cause for cheer, given that 2015 is the 50th anniversary of Singa-pore's founding and there could be elections at the end of the year. Phillip Futures analyst Howie Lee said in a market outlook note that the announcement of pro-growth policies could keep the STI supported or even send it to new highs.
By contrast, NRA Capital executive chairman Kevin Scully remains cautious. "The surprise for next year will probably be an unexpected hike in US interest rates," he said in a phone interview. Most analysts currently project a rate hike by mid-2015.
"The US economy is doing gangbusters. We're not seeing wages go up yet, but that will come. When that comes, the Fed will get worried, the Fed funds rate will pick up, 10-year (Treasury) yields will go up to 4 to 4.5 per cent," he said. US 10-year Treasuries are yielding around 2.2 per cent now, having declined from 3 per cent at the start of the year in a move that surprised most people.
Mr Scully said valuations are still fair in selected US blue-chip stocks in the consumer durables and Internet space. However, in Singapore, "you need to wait for the correction, need to be defensive". For his personal portfolio, he is one-third in value stocks that have a dividend yield of 4 per cent, one-third in property and one-third in cash.
Similarly, some deep value stock pickers are shunning the Singapore market. Yeo Seng Chong of Yeoman Capital Management, who has run an Asia-focused fund since 1997, said Singapore stocks are nearer to fair value than deeply undervalued.
He finds more opportunities in Hong Kong manufacturers, whose earnings have declined in the last few years due to rising costs but have investment merits based on their cash flow and dividends. These stocks, which make products such as eyewear, shoes, and car bumpers and headlights, could be trading at 0.4 to 0.7 times book, at high single-digit or low double-digit trailing earnings multiples, he said.
Overall, the Singapore market's rise in 2014 was driven largely by takeover activity among large-capitalisation stocks such as CapitaMalls Asia and Olam International, said UBS's Mr Tay. "If you're a fund manager managing Singapore, you would take profit from that to invest in index itself. If not for that, the index would have been very, very flat," he said.
Looking ahead, analyst projections for the STI range anywhere from 3,200 points to 3,700 points, or 5 per cent below to 10 per cent above current levels.
Phillip Futures' Mr Lee said in his report that technically speaking, there is a "double top reversal" formation that could see the index fall towards 3,168 points on decreasing oil prices. "However, in the longer term, we forecast oil prices to start its reversal in Q2 2015, which is expected to lift the STI higher," he said.
UBS's Mr Tay expects it to trade "between 3,200 to 3,500 points, and on occasions below 3,200".
"The three months before the rate increase, from March to July, will be volatile," he said.
Maybank Kim Eng research head Ng Wee Siang said his 2015 STI target is 3,440 points, based on 14 times estimated 2015 earnings. UOB Kay Hian has an end-2015 target of 3,600 points.
Just like a year ago, DMG's Mr Wong remains among the most bullish, citing Singapore's sound fundamentals and good valuations. His target is 3,720 points, based on 15 times estimated earnings.
Investors will have more opportunities next year given that the gap between the best-performing and worst-performing sectors is getting wider, said Geoff Howie, market strategist at Singapore Exchange. "There are opportunities for more risk and more return . . . (and) for sectoral rotation," he said.
According to data compiled by The Business Times, the top sector performers in the Singapore market year-on-year are finance stocks such as the local banks and real estate investment trusts (Reits). The worst performers are mining and quarry, agriculture and multi-industry stocks like Keppel Corp, ST Engineering and Sembcorp Industries.
Top gainers by value included the three local banks, which added a combined S$22 billion to the market. Top losers by value were casino play Genting Singapore (-S$5 billion) and oil-linked stocks such as Keppel (-S$4 billion) and Sembcorp Marine (-S$2.5 billion).
Penny stocks LionGold (-87 per cent) and Blumont (-79 per cent), which were caught up in October 2013's crash, continued to slump in 2014. They were among the biggest losers of market cap by percentage terms.
Another notable collapse is drilling rig owner Jasper Investments, which lost 87 per cent over the year. Jasper, the former construction play Econ International, went into deepwater oil drilling in late 2007.
Jasper's travails are a reminder of the challenges facing oil and gas players. Its Jasper Explorer drillship has not secured new drilling contracts since it completed its last contract in February 2014. Jasper Explorer bonds are in default. The company was also unable to raise enough money to take delivery of its Jasper Cosmopolitan accommodation ship, which it had ordered from Yiu Lian Dockyards (Shekou) in 2011.
Massive write-offs on both assets meant Jasper Investments' share capital was almost wiped out. At end-September 2014, share capital was US$591 million. Accumulated losses were US$580 million. Factor in other reserves and losses due to non-controlling interests, and total equity was just US$5 million.
Jasper is going to be without an operating business, as it transfers all its subsidiaries to the asset management arm of restructuring firm Borrelli Walsh.