• Slowing capex growth
• More protectionism
• Favour those with overseas foothold

Slowing capex growth

Following news reports of planned cut-backs in capital expenditures by major oil companies, we looked at the individual capex guidance figures by various companies, as well as analysts’ estimates for the next three years, and found that while international oil companies (IOCs) are reining in their capex plans, national oil companies (NOCs) in general are still keen to sustain their spending. Based on guidance by IOCs in general, there will also still be growth in capex spending, but the pace is set to slow considerably.

Deepwater rig market weaker

As with any market, the higher-cost projects will always be shelved first when the going gets tougher. In the offshore market, it is hence not surprising that the floater market has been the first to weaken, though we note that the jack-up market remains strong.

Favour companies with overseas foothold, but consider other factors as well

Against such a backdrop, companies that are able to operate in foreign markets by satisfying local content requirements should be in a better position to grow over the longer term. However, investors should not jump simply into companies just because they have exposure to certain coveted markets – they should also review the subsector that the company is operating in, the amount of experience the company has in the overseas market and of course companyspecific factors like financial health.

Preferred picks

As such, we favour companies with good market positioning and strong balance sheets – KEP’s [BUY, FV: S$12.25] “Near market, near customer” strategy puts it in good stead to secure more orders, while Nam Cheong’s [BUY, FV:S$0.445] significant exposure to the Malaysian market and established relationships with its customers positions it well to obtain more orders too. Pacific Radiance [NOT RATED], which has considerable exposure to the Indonesian the Indonesian market, has also posted results that were above the street’s expectations since its IPO last year. Meanwhile, we also favour companies operating in niched areas with a positive outlook such as Ezion Holdings [BUY, FV: S$2.70].

Source: OCBC Research - 2 Jun 2014