Yards' recovery could lag despite the oil price bounce

E&P companies seen primary beneficiaries.

The oil and gas sector is expected to slowly recover next year amidst improving oil prices, but OCBC Investment Research notes that investors must understand that there are different sub-sectors in the broader oil and gas industry, and when you recover depends on where you are on the value chain.

"Our sense is that should there be a sustained recovery in oil prices, exploration and production (E&P) companies stand to benefit first as they are regarded as more direct proxies of the oil price," it said.

After losing much of their value in 2015, OCBC Investment Research said that stock price underperformance of E&P companies was more limited this year. Investors however are advised to be selective, as a few companies in this sub-sector are in precarious financial positions.

According to the research house, the drillers and vessel charterers could then be next in line, as well as the service providers while asset fabricators (i.e. the yards), that depend on new order flows, could take a longer time to see earnings recovery, as their clients first have to regain confidence in the market before ordering new assets from them.

Meanwhile, OCBC Investment Research said that the downstream players are still doing relatively well amidst the doom and gloom in the broader industry.