Offshore & Marine - UOB Kay Hian 2016-10-07: Chasing The Mirage of A Recovery

EZION HOLDINGS LIMITED 5ME.SI EZRA HOLDINGS LIMITED 5DN.SI KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP MARINE LTD S51.SI

Offshore & Marine - Chasing The Mirage of A Recovery

Improved sentiment in oil prices has seen a lift in OSV stock prices despite minimal change in fundamentals.
Oil majors are likely to keep 2017 capex flat, leading to no earnings improvement until 2018. However, we recognise there are trading opportunities and see a possible rebound to the -1SD level.

Trawling through our O&M universe, we peg trading bands for stocks based on -2SD to -1SD 1-year forward P/B.
Maintain UNDERWEIGHT.

Recent comments by OPEC of a supply cut have seen oil prices rise by 7.8%. This is despite supply having yet to be reduced, and even then, will return OPEC production to only 2Q16 levels. If supply cut were to be effected, consensus points oil prices towards US$50-60/bbl range.

While oil prices at above US$53/bbl will put oil majors at breakeven, it is not likely to spur a capex recovery. We expect 2017 capex to be flat, or up slightly by 2.5% at best.
We had previously pointed out post oil majors’ 1Q16 results that their first priority following an oil price recovery is to lower debt and strengthen their balance sheets. This remained unchanged in 2Q16. An additional criterion for oil majors to raise capex is oil price stability of at least 6-9 months.

The OSV market still remains severely oversupplied, going by the continued low utilisation for AHTS (58%) and PSVs (56%). As of Sep 16, 383 AHTS and PSVs (7.5% of global fleet) remain on orderbook, with another 758 (14.7% of global fleet) cold stacked worldwide. Scrapping remains low despite picking up since 2015. With 2017 capex likely to remain flat, activity is not expected to see a significant uptick. A highly-fragmented Southeast Asian market, coupled with the high supply of idle vessels will see continued low dayrate bids. At current levels, OSV owners are at cash breakeven. An earnings recovery, if any, is still far away.

With the supply glut in both OSV and rig markets not abating soon, demand for newbuild assets will be low. While the yards continually proclaim a diversification into production assets will help weather the storm, these orders remain elusive.
We had on 11 Aug 16 worked out US$3.8b/year in FPS orders, a level similarly concluded by Douglas Westwood in their 2017-22 outlook. In any case, the yards are the last beneficiary of a recovery, being at the bottom of the oil food chain.

With sector trading at 1.5SD below mean, positive sentiment on oil prices is spurring stock prices higher. A rebound to 0.42x 1-year forward P/B (-1SD) seems possible based on the oil price rebound in Jan 16 which saw sector valuations move up by 1SD.
Negative sentiment from the failure of Swiber has been temporarily swept aside, but we caution that risks remain as earnings remain poor and balance sheets of selected stocks look stretched.

We provide a list of stocks and their fair valuations at between 0.27x (-2SD) to 0.42x (-1SD) 1-year forward P/B, adjusted for net gearing levels. Stocks with potential balance- sheet risks are additionally highlighted.

We expect an increase in oil majors’ capex in 2018 assuming oil prices stabilise at US$50-60/bbl for most of 2017. An uptick in earnings is expected after 1H17.
Between now to then, several quarters of poor earnings still lie ahead for offshore marine players, on top of further debt/bond repayment issues. On this, we maintain UNDERWEIGHT on the sector.
Stocks likely to have a high reaction to oil prices are (trading ranges in parenthesis) Ezion (S$0.24-0.37), Keppel Corp (S$5.01-5.80), SMM (S$1.14-1.48) and Ezra (S$0.03-0.07).

Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-07

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