Hunting for gems in the Offshore & Marine sector

Being well known by my peers as a 'constraint' value investor, i stand now on the streets of the Offshore & Marine industry as a crowd of investors runs pass me. I smell blood and i like it. 

With OPEC stuck in a political conundrum and oil prices tumbling down from recent highs, it is no surprise that investors/ traders fear for their (O&M) investments/positions. 

Yet suggestions by sector analysts and commentators that not all O&M companies would bear the brunt of this oil rout had to some extent been ignored as investors reduce their exposure to the industry. 

Industry experts who are still upbeat are saying that the current low share prices offer an opportunity for bargain-hunting. 

So what do constraint investors like me look out for? How does one know which of the O&M companies can potentially provide attractive returns beyond the short-term? These are 4 key tips that investors could look at to help them make more astute decisions. 

Tip ONE: 

Screen out companies with strong balance sheet; such that they would be well-placed to weather the storm should project inflows dry up or profit margins diminishes. It would be ideal if the firm has a strong cash position. In the O&M industry, new build contract may be honoured while some speculators may be driven out of business. This may result in asset-sale frenzy at slashed prices towards the middle of 2015, if oil prices remain weak. Cash rich O&M companies can then turn this slump into an advantageous position by picking up bargains so as to drive their top-lines and expand their businesses. 

Tip TWO:

Not all O&M companies are the same, the trick is to identify the segment of oil and gas activities that the company is involved in. For example, companies handling deepwater and ultra deepwater projects (Ezra) may certainly need oil prices to be as high as US$70 per barrel to break-even and should oil prices hover around this range or fall further, capital expenditure for future deepwater projects may be scaled down. But it is also important to note that existing deepwater projects may be spared the negative effects of the oil slump. Cancellations of such big projects are difficult due to their sheer scale and magnitude. And for those that are already well under-way, meaning the bulk of investments had already been made, incremental spending in later stage would have higher return rates. On the flip slide, Companies that handle shallow water projects (Marco Polo) , need oil price at about US$25-$50 per barrel to stay profitable and so O&M companies involved in more shallow water projects are likely to be more resistant. 

Tip THREE:

Much of the fear over O&M companies arising out of the oil price rout is that they will be deprived of new businesses if oil companies scale back their exploration and production spending. Therefore, a company with significant order book that stretch well into 2016 and beyond (Sembcorp Marine) has a higher chance of withstanding the tough external environment.

For offshore logistics companies (Ezion), instead of looking at order books, we look at their charters. Those which have secured long- term charter contracts should be assured of a decent pipeline of business over this period. 

Tip FOUR: 

Last but certainly not the least, it is important to determine the exposure of the companies. If the firms have exposure to regional and cabotage markets, they could still be in a favourable position for strong business. International oil majors may already be cutting back some of their exploration and production spending- a trend that was highlighted by analysts earlier this year- but national oil companies, which have a wider obligation of producing for national consumption and revenue purposes, are likely to continue with their E&P spending. Firms with explicit exposure to cabotage markets are by nature already in an advantageous position, as they operate in a protected environment. So firm with exposure to regional cabotage markets, such as Indonesia will be in an advantageous position.

Practice independent thinking:

I believe that oil prices will in the next 1-2 years will raise back to the $90-$100 levels, this could happen as soon as mid of next year when the OPEC meets again in June 2015; perhaps the shale oil produces will meet as well to reduce supply. Countries like North America, China, India & emerging nations economic growth could spike up again, driving oil prices up. Regardless of the reason, in my opinion this is the right time to grab up some good O&M companies; doing so is like buying a cheap non expiring call option on oil, which is good for any investment portfolio.        

As of 5th Dec, i have vested into Sembcorp marine at $2.91 and Ezion at $1.18