UOB Kay Hian believes upstream oil producers such as RH Petrogas and Rex International are immediate beneficiaries in Singapore following the upward swing in crude oil prices.
The increase in crude oil prices comes on the back of declining global oil inventories and better-than-expected global oil demand following the re-opening of economies after lockdowns. As such, SGX-listed O&G stocks have seen renewed interest, with counters seeing a jump in tandem with the higher oil prices.
UOB Kay Hian's Singapore research team notes that RH Petrogas delivered record earnings of US$3.4 million ($4.5 million), up 466% y-o-y, in 1Q2021. The team believes its earnings trajectory remains sustainable given the recovery in oil prices, reduced production costs, and RH Petrogas’s renewal of a production sharing contract for an oil field in Indonesia.
“Sembcorp Marine, Keppel Corp, CSE Global and other O&M players could benefit from positive market sentiment but much depends on whether oil prices are on a structural upcycle and not on spot oil prices,” adds the team.
The team reiterates their view that the worst may be over for the offshore marine industry, supported by the improving trends in rig utilisation and day rates. O&G project commitments for 2021-25 are forecast to increase 66% compared to the prior five-year period.
In addition, UOB Kay Hian believes the encouraging oil prices will support returns on oil projects, which rely heavily on forward prices in determining whether they are green-lighted or not. “With the Brent oil price having traded at US$55-80/bbl in the past three years, and holding at what we would consider a steady range of US$55-60/bbl, it is our view that most oil projects would generate decent IRR,” the team explains.
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Steady growth in consumption is expected to support elevated crude prices, with world energy consumption for 2021 estimated to rise 6.1%, outpacing expected global production of 2.8% and supporting the 56.4% increase in the forecasted Brent crude price.
As at 11.13 am, shares in RH Petrogas and Rex International are trading at 19.6 cents (+2.08%) and 19 cents respectively.