Offshore Marine – Singapore A Perfect Storm
As recently as a month ago, oil prices appeared fragile with angst about lower Chinese demand and higher supply from OPEC+. The recent massive China stimulus measures plus significantly worsening Israel-Iran tensions saw a 14% rally in oil prices since the end of September. Upstream oil companies like RHP and REXI are direct beneficiaries of the higher oil price. We raise our target price for STM to S$2.80 on the back of potential removal of its regulatory overhang and positive sentiment towards the sector.
WHAT’S NEW
Oil prices in a perfect storm: Prior to the recent China stimulus measures, consensus had downgraded oil prices for 2024 and 2025, citing weak Chinese economic growth as one of the primary reasons for the bearish outlook. Since then, the Chinese government’s massive stimulus measures to reinvigorate its economy have markedly changed sentiment for the better. In addition, the escalation of tensions between Israel and Iran has added a risk premium to the oil price. These two events have caused the Brent oil price to rally 14% since the end of September.
How important is Iran’s oil industry? In 2023, Iran’s total oil production was estimated at 4.7mmbpd, which equates to around 4.8% of global oil production. Despite US sanctions, the country has managed to increase its oil exports to multi-year highs of 1.7mmbpd in August. While OPEC’s estimated spare capacity of 4.55mmbpd would be able to cope with any short-term outage to Iran’s oil exports, a shutdown of Iran’s oil facilities by an Israeli attack would have a short-term squeeze on oil prices. Iran also has 2.6mmbpd of refining capacity, equating to 22% of the Middle East’s capacity, with most of its oil and gas facilities located in the south, where the Kharg Island terminal is situated and from which around 90% of Iranian oil exports are shipped.
Singapore plays: Direct beneficiaries of a higher oil price are upstream oil producers such as RH Petrogas (RHP SP/BUY/Target: S$0.231) and Rex International (REXI SP/SELL/Target: S$0.08), with the key difference between the two stocks being the former’s steadier oil production performance. Indirect beneficiaries include offshore marine names like Seatrium (STM SP/BUY/Target: S$2.80) and Marco Polo Marine (MPM SP/BUY/Target: S$0.061), although these may take longer to play out as sustained higher oil prices are required for stronger new order wins. We also highlight potential earnings upside for SCI given its historical ability to trade around its pipeline and LNG positions to earn higher margins in its Singapore utilities business.
Singapore Plays
RH Petrogas (RHP SP/BUY/Target: S$0.231): As an upstream oil producer, RH Petrogas is a direct beneficiary of higher oil prices. The company’s stable oil production performance makes it a reliable player in the sector. In the near term, a potential share price catalyst is the drilling of a well in the Arar Block of the northern part of the Basin PSC in 4Q24, targeting approximately 2mmbbl of recoverable oil. As of 1H24, RH Petrogas had no external debt or shareholder loans and held nearly US$46 million in cash and bank balances. With around one-third of the company’s market cap in cash, RH Petrogas trades at an attractive 2025 PE of 7.5x on an ex-cash basis.
Rex International (REXI SP/SELL/Target: S$0.08): Rex International is also positioned to benefit from higher oil prices, but with less steady production performance compared to RH Petrogas. Given the lack of visibility on the company’s oil production or its realised oil prices, a book-value approach has been used to value the company, leading to a target price of S$0.08, representing 1x P/B. We maintain a SELL rating for Rex International.
Seatrium (STM SP/BUY/Target: S$2.80)
Seatrium, an indirect beneficiary of higher oil prices, stands to gain from sustained elevated prices, which could lead to stronger new order wins in the offshore marine industry. Given the incrementally bullish outlook for the Chinese economy and oil prices, the conviction in Seatrium has grown. Additionally, the potential removal of its regulatory overhang could act as a share-price catalyst. Consequently, the target price for Seatrium has been raised to S$2.80, with the target P/B multiple increased to +1 standard deviation (previously S$2.31 based on a target 1x P/B multiple).
OVERWEIGHT Recommendation
The outlook for the offshore marine sector remains OVERWEIGHT. Given the improving economic outlook for China and the upward trajectory of oil prices, companies like RH Petrogas, Rex International, and Seatrium are well-positioned to benefit. In particular, Seatrium’s positive sentiment, combined with potential regulatory relief, strengthens its outlook as a top pick in the sector.
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