SINGAPORE (Dec 6): CIMB is upgrading the Singapore offshore and marine (O&M) sector to “neutral” citing anticipated gradual uptick in crude oil prices in 2017 and the Singapore government schemes to alleviate working capital and capex needs of small players.

Lead analyst Lim Siew Khee notes that the sector will also face lower impairment risks in a higher crude oil price scenario, and diminished sector default risks for 2017 to 2018 as companies have extended their loan tenures.

The uncertainties posed by Trump’s vow for US to be energy independent could have accelerated OPEC and non-OPEC countries to cut production, notes Lim, as shale output remains resilient, with an 11% drop since 2015.

“Higher production and supply, amid lacklustre global demand growth (Europe and Brexit uncertainty, China’s economy rebalancing) would put a cap on the deficit quantum and oil price, in our view,” says Lim.

“As such we believe that oil prices will stay in the range of US$45-60/bbl in 2017, high enough to improve the fiscal deficit of oil producing nations but not too high that they would spur a surge in shale and other crude oil production,” she adds.

Shallow-water asset owners are likely to benefit before yards, notes Lim, with exploration and production players primary beneficiaries of a price rally, given the high prices for their products. Shallow-water OSV players are likely to benefit as production and maintenance are prioritised over exploration in the early sector recovery. Yards are likely to face a protracted winter, notes Lim, as there is still a global asset glut to draw down on.

“The sector valuations are now lower than the trough levels during the global financial crisis,” says Lim.

Lim cautions that there are still uncertainties in 2017, such as OPEC and Russia adhering to production limits, Trump’s policies on US production, anaemic world GDP and existing asset glut which could limit earnings in the next 1½ years.