Adapting to the cycle

The O&G market is on firmer ground now versus a year ago as it adapts to the low oil price environment through cost rationalization, capital discipline and cashflow preservation. An absolute recovery is still a distance away but the overall risk-reward balance has improved. The fall in share prices has absorbed much of the negatives with valuations turning attractive, making it fertile ground to bottom fish. The volatility in the oil market also offers periodic cyclical, alpha play opportunities. Our preferred BUYs are Yinson, BArmada, KNM and Dialog.

2016: Nursing back from injury

The O&G market has begun to accept the new reality as it overcomes the shock that engulfed it a year ago. We see pockets of progress but an absolute recovery remains off the cards. Cost cuts and cash flow prudence remain core initiatives for 2016 while financial sensibility and resilience are admirable qualities under current circumstances. Operationally, DCRs for rigs and OSVs have stabilized but remain low. Activities, however, are slowly picking up. The O&G sector is a hotbed for corporate exercises (i.e. M&A actions) as the market consolidates. Opportune time to bottom pick low hanging fruits

The de-rating of the sector following the fall in share prices has practically absorbed much of the negatives, capping downside risk. The volatility in the oil market also offers pockets of opportunities in the sector, from a valuation/newsflow standpoint. This makes the sector a fertile ground to periodically stock pick.

Resilience, growth, valuations & Shariah compliance

RAPID, FPSO and renewable energy will make thematic headlines in 2016. Segment-wise, we prefer the FPSO space over rigs, OSVs, fabricators as it is less sensitive to the fluctuation in oil price and capex cuts, given the bankable contract exposures, financial resilience, visible growth prospects and undemanding valuations of such operators. Being Shariah compliant is a major plus.

Source: Maybank Research - 7 Jan 2016