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Where Is The Value In The Oil Services Sector?

The Offshore Services industry in Singapore is worth a total of nearly S$8.5b, and it compromises 32 companies.

The largest player in the industry is Ezion Holdings (SGX: 5ME) worth nearly S$2b. The provider of logistics and support services to the offshore oil and gas industries has seen its share price mirror the oil price over recent months.

From over S$1.90 a share in September, Ezion fell by almost 50% to just S$1.02 in December. Since then the shares have steadily recovered but is still some way below its peak at just S$1.26 a share.

A similar story can be seen at PACC Offshore Services Holdings Limited (SGX: U6C). The second biggest company in the industry finds its share price down at 54 cents a share from over S$1 in August.

The uncertainty surrounding the oil and gas industry could be paving the way for brave value investors to look at stocks that are, perhaps, undervalued. Could this be the case for these two big names?

A look at the fundamentals doesn’t exactly provide a clear answer.

Ezion is priced at around 10 times earnings, which is below the market average. Meanwhile PACC is priced at a whopping 70 times earnings, around five times the market average. It would seem at first glance that Ezion might be the better value option.

However, Ezion is priced at a 40% premium to its book value, whilst also rewarding its investors with just a 0.1% dividend yield. Much more appealing on these metrics is PACC. Priced at a 40% discount to its book value, it is also gifting a generous 8.8% dividend yield.

With uncertain times ahead for the oil and gas industry and the sub sectors surrounding it, the safe bet for investors could be larger companies with comfortable cash cushions. Ezion and PACC might fit the bill.

For those who are prepared to take on more risk and, therefore, potentially greater reward, MTQ Corporation Limited (SGX: M05) looks interesting as a value share.

The company is priced at less than ten times earnings. It is priced at its book value and currently yields 4.5%. However, it is only valued at S$138m. It only has S$18m in cash reserves, compared with say Ezion’s S$1b cash pile.

The uncertainty around global oil prices and its effect on the oil and gas industry has led many to become fearful. If we are to follow the words of Warren Buffet then now is the time to be greedy.

This does not mean jumping blindly in, but rather looking for well run, financially stable companies that can see out the tough times and come out the other side stronger.

 

 

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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.