Saturday, June 5, 2010

Oil and Gas Sector Watch

It’s about time to revisit O & G sector as the crude oil price seems to be stabilizing around US $ 70 – 80 bbl. At this level of crude oil price, O & G activities should pick up quite a bit. Most of the stocks in this sector seem to be quite depressed. Let me show you some samples of stocks that had corrected more than 20% from the recent peak. Some as severe as 30%-50%.

O & G industry is a very capital intensive industry. Size matters. Without certain size, there is no way you can bid for bigger jobs. Without certain size, you also can’t raise capital cheap enough. When the M & A tides come, the smaller one will be drown!

Here are some of 2009 revenue of some of the bigger players(RM $ billion)in our bursa:

(i) SapuraCrest 3.4
(ii) Wah Seong 1.9
(iii) Kencana 1.1
(iv) Dialong 1.1
(v) Petra Perdana .61
(vi) Alam Maritim .35

If one is bullish about O & G sector, Sapura Crest and Wah Seong are must haves in the portfolio.

Sapura Crest is big, RM 15 billion outstanding order booking, strong balance sheet with around 20% gearing, high ROE, paying dividend consistently are well like qualities.

Wah Seong is also a no brainer as it is one of the largest pipe coating in the world. The recent failure to bid Italian pipe coater Socotherm could have disappointed investors or punters. They have almost half-a-billion cash in hand, will be handy when the right opportunities come. High ROE 20%+ with no debts, 3% dividend yield and proven acquisition track records are something that I like a lot.

Kencana has 2 billion outstanding order in their book gives us relatively clear earning visibility. Strong balance sheet, good profitability and okay dividend yield should be okay to put some chips(not too much though) in this company.

Dialog – expensive, 20X PE with little growth visibility. Stay away.

Petra Perdana. Ah, board room tussle. No clear strategy. Putting money in Alam Maritim will be a better choice.

Alam Maritim is smaller but what I like about them is they are trying to be “AirAsia” of Offshore Support Vessels provider. Their 32 vessels ownership makes them one of the largest in Malaysia. They are ordering 4 more vessels to be delivered between Q4 ’10 to Q1 ’11. 2011 earning should expand with this added 20% more capacity. High gearing 100+% and low dividend are the two things that worry me a bit. But high pretax profit of 30% offset some of my concerns, 100 mln pre-tax profit should be able to service their finance charges of around 25 mln.

You may notice that I did not set any price target this time round. That means you have to time the entry and exit yourselves.

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