Oil and Gas - Patience needed; expect more trading opportunities‏

• Stick to focused stock-picking

• Few re-rating catalysts for now

• Maintaining defensive stance

A volatile year as expected
Our year-end report last year was titled “Go for quality in 2015” and we had been cautious on the broader oil and gas sector since then. After OPEC decided to abandon its traditional role of paring production to support oil prices, it became increasingly apparent that oil prices would remain low with weak global economic growth, amid ample oil supplies and a strengthening US dollar. As such, it is perhaps not surprising to most that the FTSE Oil and Gas index is down about 35% to-date.

Few re-rating catalysts in sight
At current levels, valuations are not demanding, but we also see a lack of strong re-rating catalysts in the near term. We had mentioned in our reports that risks were “tilted more to the downside”, and though stock prices have corrected significantly since, we would still refrain from calling a recovery now (barring a spike in oil prices). Though oil prices may have bottomed, companies in the sector are still operating in difficult conditions due to the low oil price environment, especially those that are operating in segments of the industry with relatively high breakeven costs. That said, short-term trading opportunities will be there in a likely volatile year.

Sticking to our defensive stance
We believe that the oil and gas sector has positive long-term fundamentals, but stepping into 2016, we continue to see headwinds for the industry as oil and gas companies are wary of new investments amidst a rebalancing oil market. As such, we would favour companies with strong balance sheets to weather the downturn. Those with exposure to higher quality clients and a significant outstanding order book should also be more resilient. In addition, companies that have the ability to diversify into non-oil and gas related sectors and do so successfully would also be worthy of investors’ attention. Meanwhile, longer term investors keen to have an exposure to this sector may wish to consider Ezion Holdings [BUY, FV: S$0.90] and Triyards Holdings [BUY, FV: S$0.61]. Maintain NEUTRAL on the broader sector. (Read Report)

Source : OCBC Investment Research

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