Go for small caps in offshore play: OSK DMG
By Goola Warden

The outlook for small players in the Oil and Gas services sector remains bright, say analysts Lee Yue Jer and Jason Saw of OSK DMG after attending the OSV Conference in Singapore during the week.

In an Apr 11 research note, the analysts say that strong growth in global energy demand will set a positive macro backdrop. " Global energy demand is expected to grow 30% by 2040, driven by a population increase of 25%," write Lee and Saw. Meanwhile, electricity generation will be a priority, with Exxon-Mobil estimating a 60% increase in demand for natural gas. Also, global oil is expected to continue on its trend path of 0.7% annual growth, while gas is growing more than twice as fast at a 1.6% CAGR over the next 30 years.

In turn, OSK DMG expects Exploration & Production (E& P) spending to increase 8% in 2013, 10% in 2014. This is because oil price is at the “upper bound of oil majors’ comfort zones” and history has demonstrated that this leads to increases in exploration & production budgets, the analysts say. " The 8% increase this year can be broken down into 4% real growth and 4% inflation, which we see supporting contractors’ margins," says OSK DMG.

With this is mind, demand for OSVs is expected to remain strong on rig orders. OSVs are typically ordered 12-18 months after rigs, and the strong rig orders of the recent two years is sending the OSV market into an upswing. Industry players still see strong demand for additional rigs, and the OSV fleet was described as being “at replacement requirement” and “bullish on new orders”, the report notes. The analysts prefer the small caps because of valuation.