Singapore Offshore Marine: A Perfect Storm for Growth Amid Oil Price Rally and Geopolitical Tensions
Broker: UOB Kay Hian
Date: October 8, 2024
The offshore marine sector in Singapore is entering a period of significant growth, driven by a combination of higher oil prices and escalating geopolitical tensions. Recent developments, including China’s economic stimulus measures and increased tensions in the Middle East, have led to a 14% surge in oil prices since late September. This has created a favorable environment for upstream oil companies and offshore marine players, positioning them for substantial gains in the coming months.
Oil Prices Surge Amid Geopolitical Risks
Oil prices have rallied sharply, fueled by concerns over a potential disruption in Iran’s oil supply amidst escalating tensions with Israel. Iran’s oil production, estimated at 4.7 million barrels per day (mmbpd) in 2023, represents about 4.8% of global production. Any significant disruption to Iran’s oil exports, which hit multi-year highs of 1.7 mmbpd in August, would likely create short-term supply constraints, further boosting oil prices.
While OPEC has sufficient spare capacity to cope with any temporary outages, a direct hit to Iran’s oil facilities could still cause a short-term squeeze on oil availability. This scenario would be particularly impactful given Iran’s key role in the region, with 90% of its oil exports shipped from the Kharg Island terminal.
Singapore Offshore Marine Sector: Positioned for Gains
The Singapore offshore marine sector stands to benefit significantly from these developments. With oil prices now hovering at higher levels, upstream oil companies and service providers are likely to see increased demand for their services. Key players such as Seatrium, RH Petrogas, and Rex International are expected to be direct beneficiaries of this trend.
Seatrium (STM)
Ticker: STM SP
Recommendation: BUY
Share Price: S$2.10
Target Price: S$2.80
Seatrium is positioned as one of the top picks in Singapore’s offshore marine sector. The company is set to benefit from higher oil prices and the removal of its regulatory overhang, which has previously held back its share price. UOB Kay Hian has raised its target price for Seatrium to S$2.80, reflecting a significant 33% upside from its current share price of S$2.10. The new target price is based on an elevated price-to-book (P/B) multiple of +1 standard deviation.
Seatrium’s strong exposure to the offshore oil and gas industry, coupled with improved sentiment in the sector, makes it a compelling buy for investors looking to capitalize on the bullish outlook for oil prices.
RH Petrogas (RHP)
Ticker: RHP SP
Recommendation: BUY
Share Price: S$0.205
Target Price: S$0.231
RH Petrogas is another key beneficiary of the rising oil price environment. The company is expected to see a boost in earnings from its upstream oil production activities. RH Petrogas has a strong pipeline of projects, including the drilling of a new well in the Arar Block in 4Q24, targeting around 2 million barrels of recoverable oil. The company’s balance sheet remains strong, with no external debt or shareholder loans, and cash reserves of nearly US$46 million as of the end of 1H24.
UOB Kay Hian has a “BUY” rating on RH Petrogas, with a target price of S$0.231, offering a potential upside of 12.7%. On an ex-cash basis, RH Petrogas is trading at a very attractive 2025 price-to-earnings (PE) ratio of 7.5x, making it a value play in the current market.
Rex International (REXI)
Ticker: REXI SP
Recommendation: SELL
Share Price: S$0.139
Target Price: S$0.08
In contrast to RH Petrogas, Rex International faces a more uncertain outlook. The company has limited visibility on its oil production and realized oil prices, prompting UOB Kay Hian to maintain a “SELL” rating. The target price for Rex International is set at S$0.08, based on a 1x P/B methodology rather than earnings or discounted cash flow. The stock’s limited transparency regarding future production makes it a less attractive investment in the current oil market rally.
Geopolitical Risks and Long-Term Outlook
The escalation of geopolitical risks, particularly in the Middle East, has added a risk premium to oil prices. While the immediate impact on oil supply is uncertain, the market’s reaction has been bullish, with Brent crude prices rising in response to both geopolitical concerns and China’s stimulus efforts. The combination of these factors has created an ideal environment for companies in the offshore marine sector to thrive, particularly those with direct exposure to upstream oil production.
Conclusion
With oil prices on the rise and a favorable macroeconomic backdrop, Singapore’s offshore marine sector is poised for significant growth. Companies like Seatrium and RH Petrogas are well-positioned to capitalize on this trend, offering attractive investment opportunities for those looking to benefit from the ongoing rally in oil prices. As geopolitical tensions continue to unfold, the sector remains one to watch closely, with further upside potential in the months ahead.
