• Recovery started in 2H17
• To continue next year
• Significant contract wins needed for sustained recovery

Indeed, 2017 Saw Signs of Recovery in Sentiment

A few years post the oil and gas downturn which started in earnest in 3Q14, we trace the series of events and review our year-end report titles for each year. In end 2014, we sounded caution on the broader sector with our report “Go for quality in 2015”, followed by “Patience needed; expect more trading opportunities” in end 2015. Last year, we headlined our report with “2017 to be as newsflow heavy”, and also mentioned that 2017 could see a recovery in sentiment, especially in the second half of the year.

Indeed, we saw a pickup in share prices of the large caps starting early this year, which took a breather in the middle of the year, readying for another spurt in 3Q17. Understandably, most of the mid and smaller cap stocks remained subdued due to continued bond and company restructurings.

Still, what was witnessed in 2017 remains rather tame by historical standards, and we believe that the share price recovery for big caps is mainly a normalisation from previously oversold levels, along with some hope that new contracts will be secured again, though in fits and starts.

Gradual Recovery in 2018; Continued Flow of Orders Needed for Sustained Recovery

Looking ahead in 2018, we expect the sector to recover gradually, as oil majors adapt to the lower oil prices environment and are better positioned to proceed with final investment decisions. Orders are still mainly expected from the non-drilling segment as recovery in the drilling market will still take time. However, should there be significant contract wins in 2018 for Keppel Corp (KEP) and Sembcorp Marine (SMM), we see chances for trading opportunities like the price spikes we saw this year especially for the latter.

A sustained recovery will only ensue with a continued flow of contract wins, which will drive a re-rating of related stocks in the sector.

Maintain BUY on Large Caps

We first turned less negative on SMM in Dec 2016 when we upgraded our rating from Sell to Hold, and later upgraded it to Buy on 23 Feb 2017. KEP was also upgraded to Buy on 22 Feb. On a sector-wide basis, we maintain NEUTRAL given continued unease over the small-mid cap space. Speculation of a potential merger of the two yard groups continues, and we also await the results of SCI’s strategic review.

Our preferred picks are KEP [BUY; FV: S$8.41] and SCI [BUY; FV: S$3.59], though we note that a faster-than-expected recovery in oil price or contract flows would benefit SMM [BUY; FV: S$2.26] the greatest

Source: OCBC Research - 1 Dec 2017