SINGAPORE (Jan 23): DBS Vickers Securities is maintaining its “overweight” stance on the oil and gas (O&G) sector given the recent oil price rally, which has driven up O&G stocks to directly benefit oil majors leading the rally.

In a Tuesday report, lead analyst Suvro Sarkar says the average Brent crude oil price for 2018 could end closer to the higher range of US$60-65 per barrel (/bbl) as forecasted by DBS – a healthy 15-20% improvement over the 2017 average of US$55/bbl.

“While potential oil price pullback might cap the upside of upstream plays, sustainable oil price above US$60/bbl level should drive capex expansion and benefit players down the value chain,” states Sarkar.

In particular, he notes that the Brent crude has had a much more positive start to the year than expected at its latest US$65-70/bbl levels, which represents a significant uptrend compared to the 2017 average, in his view.

This is anticipated to come on the back of continued capacity cuts by OPEC, improving global demand, and falling crude oil inventory levels in the US, all of which have contributed to the positive sentiment along with events of one-off supply disruptions and heightened geopolitical risks.

While the analyst sees some short-term pullbacks from the US$70/bbl level in the near-term as well as some volatility ahead – depending on the response of US shale drillers to the higher oil price environment – he believes the overall average should nevertheless underpin hopes of capex recovery and drive positive stock market sentiment for the sector.

“With shareholders demanding better discipline on the use of operating cash flows and further access to debt markets drying up in the face of high leverage ratios, shale company executives have been increasingly promising more prudence, with a focus not on aggressive drilling campaigns but on ensuring better returns on equity, debt repayment and eventually cash returns to shareholders,” Sarkar elaborates.  

“It remains to be seen though how they will react to US$70/bbl oil prices, and a look at capex budgets during full-year announcements in February should give us a better idea as to whether the restraint is for real.”

All in, DBS says it will continue to avoid services players with stressed balance sheets, and highlights Sembcorp Marine (SMM) and PACC Offshore Services Holdings (POSH) as two stocks among its list of top “buy” picks with the respective target prices of $3.10 and 51 cents.

The former’s robust contract pipeline is believed to be a potential catalyst for the group’s share price moving forward, while POSH has been picked for its improving utilisation of offshore service assets.

Meanwhile, Mermaid Maritime has been rated “hold” with a target price of 14 cents. 

As at 3pm, shares in SMM, POSH and Mermaid Maritime are trading at $2.55, 44 cents and 16 cents respectively.