Will higher oil prices bode well for SG's oil-related stocks?

Oil prices have risen 37% in 2022.

Singapore's oil-related stocks, whether from exploration and production (E&P) or offshore and marine (0&M) companies, will likely benefit from higher oil and gas prices, according to UOB Kay Hian. In 2022, oil prices have risen 37%.

Usually, only E&P companies would directly benefit from higher oil and gas prices. 

However, since the majority of 14 oil-related companies had double-digit free cash flow (FCF)  yield in FY21, UOB kay Hian said even O&M companies could benefit from the elevated prices. 

The 14 companies exclude Keppel and Sembcorp Marine.

"O&M companies only benefit when higher levels of activity and capex flow through from the upstream companies," UOB Kay Hian explained.

Apart from having a double-digit FCF yield, half of the 14 companies in SGX also were debt free as of end-FY21.

Three companies in particular – Baker Tech, China Aviation and Dyna-Mac – had net cash levels that were more than 40% of their market capitalisation.

"In our view, this potentially points to an equally strong year in 2022 given that oil prices remain high, thus underpinning the robust activity levels that have continued in the O&M sector this year," UOB Kay Hian said.

"Should these companies continue their strong financial performance in 2022, the probability of higher dividends cannot be ruled out," the analyst added.