Is SembCorp Marine a potential gold-mine or ticking time-bomb?

Which way, oh which way, will the oil price go?

SembCorp Marine's (S51) stock price languished in 2016 along with KeppelCorp's, as oil prices were driven down at the beginning of the year by severe global overproduction. SembCorp traded above $3.00 per share at the start of 2015. In early 2016, prices fell as low as $1.32 per share (demonstrating a 56% drop in a year), as oil prices plummeted. SembCorp suffered as contracts for rig-building dried up, and was forced to cut staff in the second half of 2016 as earnings dipped. The company, however, had an optimistic outlook:

"Despite the challenging outlook and intense competition, we believe that growth prospects for the offshore and marine industry remains encouraging over the long term."

December 2016 brought a ray of hope to the industry, as OPEC member and non-member countries stunned critics agreed to cut oil production by January. Recent reports [credit: Sydney Morning Herald] have cited that both OPEC and Russia have been cutting production a lot faster than expected, with as much as 1.5 million barrels being removed from the market daily. While Brent Crude is a far cry from its days above US$100 per barrel, the price has recovered to the 50+ region from the 30s, as critics await to see what effect these cuts would have on the oil price.

Hypothetically, if oil prices move higher due to the constant cuts, we can expect to see crude oil prices move upwards, which could eventually lead to companies resuming their oil-related activities, which were previously abandoned due to plummeting oil prices. Additionally, as mentioned in my previous post on DBS, the Singaporean government has stepped in to assist the Oil and Gas sector, announcing financial schemes to assist in financing projects through the Ministry of Trade and Industry.

Source: Yahoo Finance

It would be easy to maintain an optimistic view of 2017, but SembCorp's order book needs to be closely monitored - if their order book remains dry, stock prices can be expected to fall as quarterly results are revealed. Currently, the company's subsidiary - Jurong Shipyard - is bidding to construct parts of an Oil and Gas vessel for Norway's Statoil [credit: Upstream Online]. Additionally, with Trump taking office, we will need to see what his 'America First Energy Plan' entails - Trump hopes will make America independent from OPEC by tapping into energy to replace oil. 

SembCorp Marine closed at 1.535 yesterday. Optimistically, we should see a conservative 2.00 by June this year, but only after a few retracements to the 1.40 region as oil prices fluctuate. Oil prices drastically need to recover if Sembcorp is going to stay afloat, as current prices are still too low for oil firms to confidently restart development. I'll be keeping my eye on this.

Until next time

Creed