Gaining from oil price hike

It's time to take a look at lesser-known firms, which appear reasonably priced, says CHEW XIANG

Sept 08, 2006
The Business Times

IT IS tempting - if you haven't already done so - to buy into the major oil and gas-related conglomerates here, given still-high oil prices and as yet little sign of a slowdown in demand.

High oil prices have historically coincided with massive investment in exploration and production (E&P) equipment. Many of the rigs in use now were built during the last oil price peaks in the 1970s and are nearing the end of their lifetime. They will have to be replaced - and that can only mean a bonanza for companies like Keppel Corp and SembMarine, which together are building 60 per cent of all offshore rigs now under construction.

Last month, Merrill Lynch issued a report reinstating coverage of Keppel Corp, SembCorp Industries and SembCorp Marine with 'buy' ratings. 'We expect record earnings over the next three years to be key catalysts to drive share prices higher,' said analyst Choo Tse Wei, who sees upside potential of 12-18 per cent.

But are these big names necessarily good investments? Keppel Corp had a 2005 PE of about 21, and SembMarine 39.3. Analysts estimate lower forward PEs of about 17 and 22 respectively, which could mean these stocks are close to being overvalued. And buying into Keppel Corp, for example, which closed yesterday at $15.30, means a five-digit outlay per lot, which could be daunting for the small investor.

So it may be worth taking a second look at lesser-known companies which, like the remora fish, ride on the big sharks of the industry. According to Westcomb Securities research head Chew Sok Chuang: 'We should not underestimate the potential benefits of those companies whose products and services are crucial to the final industrial structure or framework for use in oil and gas sector.

'Usually, such companies go unnoticed because the market focuses on the obvious beneficiaries such as those companies involved in mega projects and contracts like rig building, refinery, oil storage terminal, LNG pipelines and terminal.'

It usually takes 36 months to build an oil rig, and the support companies typically come in some time after the initial order has been placed. 'The full benefits to these companies could only be visible at a later date compared to companies which are direct beneficiaries,' Ms Chew said.

Such companies include the three that Indonesian tycoon Kris Wiluan has bought into and is trying to tie together - KS Energy, its subsidiary Aqua Terra Supply (ATS) and SSH Corp. KS Energy supplies refurbished rigs, a good stopgap for exploration companies waiting for new rigs, and the other two companies supply oilfield equipment. The strategy to create an integrated rig-related partnership seems sound, and Mr Wiluan has 30 years of connections in the oil and gas industry in Indonesia.

The companies appear reasonably priced, too. For example, Westcomb Securities last week put out a 'buy' call on Aqua Terra with target price of 63.5 cents, more than 40 per cent above its closing value yesterday.

Analysts' consensus forecasts also show parent company KS Energy's stock to be trading at 13 times this year's earnings, and 10 times next year's.

Other oil and gas support companies seem to be bargains too. Rotary Engineering, which recently reported a 150 per cent year-on-year surge in half-year turnover, has a fair value of 88 cents, according to a report released early last month by OCBC Investment Research. That suggests considerable upside potential to its closing price yesterday of 56.5 cents.

And BH Global, which supplies marine cables for oil rigs and supply vessels, recently saw a 50.2 per cent jump in first-half net profit on 67 per cent growth in revenue. As well, analysts have issued buy calls on Ezra Holdings and ASL Marine, marine companies with considerable exposure to the oil and gas industry and which recently reported double-digit earnings growth.

The industry is still in the early years of a possible five to 10-year boom cycle, according to a June report by JPMorgan. With build orders for E&P projects, and refining, storage and related activities seemingly not letting up, it appears that the best is yet to come for the renoma fish.