O&G sector due for a turnaround on rising capex in 2019 & beyond, says DBS

SINGAPORE (Oct 5): DBS is maintaining its average Brent crude oil forecasts of ~US$75/bbl for 2018 and US$75-80/bbl for 2019, with the intention to monitor developments in the coming weeks.

The move comes despite growing optimism on the possibility of oil prices rising above US$100/bbl due to talks of Saudi Arabia and Russia striking a private deal to raise production and US inventory buildup.

In a report on Friday, analyst Suvro Sarkar says he believes any sign of supply shortfall will continue to keep an upward pressure on the price of oil, while capex looks like it is set to rise to subsequently filter down the sector value chain as well as drive the recovery of service providers and rig builders.

As such, he recommends investors to go for key oil and gas (O&G) proxies like Sembcorp Marine, rated “buy” with a target price of $2.50, as they have been rising about 30% since mid-August 2018.

“Oil and gas stocks had a good run alongside oil price and equity market rebound,” observes the analyst. Despite this, he also notes that stocks like Sembcorp Industries, rated “buy” with a target price of $3.90, are trading on undemanding valuations.

“While it is difficult to ascertain how much of the 2.5 million barrels of oil per day (mmpbd) of exports from Iran will be affected when US sanctions kick in on 4 Nov, it is becoming more apparent that the rest of the OPEC cartel may not have enough spare capacity to ramp up sufficiently to fully offset the loss from Iran,” says Sarkar.

“Looking beyond the imminent supply shock from Iran, the drastic plunge in capex since 2014 has resulted in lower discoveries, which will lead to a supply gap in the medium-term. This should prompt global oil majors to raise capex in the next few years… We believe sustained high oil prices and low new discoveries will eventually lead to a decision to raise capex from 2019 and beyond, which would filter through the value chain” he adds.

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