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Opportunities In The Offshore Oil Services Sector

Oil prices have fallen dramatically over the last six months. Between 2010 and mid-2014 the price of oil hovered around US$110 a barrel. Since then, the price has plummeted by nearly 50% to around US$60 for a barrel.

Falls in the price of oil is great news for consumers, who could find that their energy could now cost less. However, for many countries and some corporations, falling oil prices could pose a dilemma. That said, some oil-producing countries can cope with low prices. But not every can.

The same applies to oil producing companies. Whilst some of the largest players such as BP, Royal Dutch Shell and Exxon Mobil could have the financial muscle to ride out prolonged low prices, some smaller firms could struggle.

Apart from oil producers, oil services companies could be impacted too, as projects are either delayed or shut down indefinitely.

In the face of uncertain revenues for oil services companies, value investors could be looking for businesses that could withstand tougher times. The two clues are cash and valuation.

A substantial cash pile could let a company meet its financial commitments with certainty, even when revenues could be less certain. Meanwhile, a company priced below its book value could limit the downside, in the worst case, for investors.

In Singapore there are 32 quoted companies involved in support services for oil companies. Five of the largest players account for nearly half of the total market capitalisation of the industry. They also have the most cash on their balance sheets.

Ezion Holdings Limited (SGX: 5ME) is the largest with a market capitalisation of nearly S$2b. The company has over S$400m in cash to fall back on. However, it is currently priced at a 30% premium to its book value.

Of arguably better value in the current climate are Ezra Holdings Limited (SGX: 5DN) and Mermaid Maritime PLC (SGX: DU4). They are both considerably smaller than Ezion. Ezra is valued at S$550m, while Mermaid has a market value of S$420m.

Ezra is sitting on S$240m in cash, while Mermaid has S$103m in readies. Interestingly, they are both priced below their book values. Mermaid is priced at 0.6 times its book value and Ezra seems even better value. Its market cap is only only half its book value.

Some might argue that there remains some unquantifiable risk involved in anything related to the oil and gas sector. After all, over the last six months as oil prices have fallen so too have the values of these companies.

But it is precisely in times like this that value investors could find the most attractive bargains.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Adam Kuo doesn’t own shares in any companies mentioned.