UOB Kay Hian Research 2015-07-02 (Offshore & Marine Sector): July Update On Oil Price Estimates, Top Picks remain SCI, Ezion Holdings and Triyards

July Update On Oil Price Estimates 

  • We set our Brent oil price estimates for 2015 and 2016 at US$61/bbl and US$72/bbl respectively. 
  • Oil prices appear to have found some stability with Brent at above US$50/bbl. 
  • OSV tender activities are now recovering gradually as companies recover from their shell shock in the aftermath of the oil price collapse. 
  • The industry downturn has not bottomed yet but industry-wide cost cutting is the silver lining. 
  • Our top picks remain SCI, Ezion Holdings and Triyards. Maintain MARKET WEIGHT. 


WHAT’S NEW 

  • We set our Brent oil price estimates for 2015 and 2016 at US$61/bbl and US$72/bbl respectively. 
  • We change our house estimates for average Brent crude oil price (Brent) to US$61/bbl (from US$65/bbl) for 2015 and to US$72/bbl (from US$70/bbl) for 2016. 
  • Our estimates are derived from the mean forecast of 38 agencies, comprising 37 international brokers/banks and one US oil agency. 
  • We have only included forecasts published in 2015 as estimates prior to 2015 do not reflect the current environment and would have skewed our average. Our estimates will be updated at the end of each month going forward and be raised/lowered accordingly if the deviation exceeds 5%. 
  • Oil prices appear to have found some stability with Brent at above US$50/bbl. 

• Oil price up 12% ytd on product demand. 

  • Brent has risen 12% ytd, touching a low of US$46.59/bbl in Jan 15 before rebounding to close at US$63.59/bbl on 30 June. 
  • According to the International Energy Agency (IEA), demand was due to three temporary factors - economic growth, colder-than-year-earlier winter conditions in Europe and lower prices. 
  • Oil analysts shared similar sentiments, commenting that the “surging demand” seen was not what it was. They highlighted China’s crude imports for May, which fell 1.9 million barrels per day (mb/d) from its April record-high of 7.4mb/d, was potentially opportunistic stockpiling. 

• Brent is trading at US$62-66. 

  • For June, Brent traded in a tight band of US$62-66/bbl, closing at US$63.59 on 30 June. 
  • Physical markets are giving no clear direction on oil price. 
  • Brent reached a month-high of US$66.37 after the conclusion of OPEC’s bi-annual meeting in Vienna, where the oil producer group commented that demand was improving and maintained its 30mb/d production target. 
  • As of end-May 15, OPEC was producing about 31.3mb/d, 1.3mb/d above target. 

• 1H15 demand strength may not persist into 2H15. 

  • IEA commented that demand strength in 1H15 was due to temporary factors as highlighted above and expressed their scepticism if it would persist into 2H15. 
  • European heating-degree days (the number of degrees that a day’s average temperature is deemed as ‘required heating’) increased by 15% yoy in 1Q15, and a repeat in 2H15 of such weather conditions cannot be counted upon. 
  • Additionally, with oil price having rebounded from its yearly low, price support from demand would wane. 
  • Demand is expected to ease in 2H15 due to a deterioration in OECD growth and as initial post-recessionary bounces in many countries diminish. 

• Watching Iran. 

  • Based on ICE data dated 9 June, money managers’ net-long positions in Brent crude fell by 3.4% to 201,180, the lowest since 24 March. Key factors leading to this decline were: 
  1. a) OPEC’s intention to raise output to account for Iran, which will add nearly 0.5mb/d of oil production (0.52% of current global production) by end-2H15 once sanctions are removed, and 
  2. b) IEA’s upward revision of non-OPEC supply by 0.2mb/d to 1mb/d. 
  • This was owing to the US shale oil production resilience, which saw annual growth of 0.93mb/d in June despite a 54% yoy decline in rig counts, leading to IEA’s revised assumption of a higher US production baseline. 

• Oil demand/supply balance. 

  • As of May 15, the demand-supply imbalance was 2.7mb/d, having widened from the 1.1mb/d gap seen in 2014. Supply fell by 155kb/d to 96.0mb/d, while global demand averaged 93.3mb/d for 1H15.
  • Since their Jan 15 report, IEA has raised demand by 0.7mb/d to 94.0mb/d, with non-OPEC supply revised upwards by 0.5mb/d to 58.0mb/d and OPEC natural gas liquids (NGL) revised downwards by 0.1mb/d to 6.6mb/d. 
  • IEA expects OPEC supply (excluding OPEC-NGLs) to be maintained at 31mb/d for the coming months, translating into total OPEC supply of 37.6mb/d. 
  • Putting two and two together, total supply equates to 95.6mb/d, implying a 1.6mb/d oversupply for 2015. 

ACTION 


• Maintain MARKET WEIGHT. 

  • We retain our stock recommendations and maintain MARKET WEIGHT on the sector. 
  • The global O&G industry faces poor earnings visibility as capex and operating costs are being cut. 
  • An austerity drive now permeates the entire industry − among oil companies, service providers and shipyards. 
  • 4Q14 and 1Q15 saw a fall off the cliff. 
  • While activities are returning, oilfield services companies are expected to post poor earnings performance for 2Q15. A meaningful recovery might be seen only in 2H15. 
  • In the meantime, stock prices of mid- and small-cap oil service stocks have fallen close to cyclical trough valuations of 0.5x. 
  • Our top stock picks in the Singapore offshore & marine sector remain Sembcorp Industries (SCI), Ezion and Triyards. 

ASSUMPTION CHANGES / CATALYSTS / RISKS 


• Oil price the key risk. 

  • Two key risks in the sector are: 
    1. protracted low oil prices, and 
    2. another fall in oil prices. 
  • Both would significantly impede future capex spending, which needs to rise to return activity to post-crash levels.

STOCK RECOMMENDATIONS 




(Nancy Wei, Foo Zhiwei)


Source: http://research.uobkayhian.com/




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