Deepwater Becoming Marginalised
- We expect shale oil all-in production costs to fall below that of ultra-deep water on the global marginal cost curve, which makes the latter the highest-cost marginal producer in demand.
- Maintain SELL, with a lower SGD0.36 TP (21% downside, from SGD0.47) based on 0.6x P/BV.
- The economics suggest a prolonged period of asset price depression, asset under-utilisation and low global order flows as oil majors freeze (ultra)deepwater projects in favour of onshore/shallow-water ones.
Resistance is futile against macro factors.
- Globally, oil majors are cutting capex budgets and being more selective on green-lighting projects.
- The axe should fall hardest on the highest-cost, longest-time-tofirst-oil projects, ie ultra-deepwater exploration fields.
- Under-utilised ultra-deepwater assets are then likely to encroach into the deepwater bidding space and exert downward pressure on rates and overall asset utilisation, crimping long-term order flows for this market segment.
Survival of the fittest in the shale field.
- We see more scope for technological improvements in onshore shale drilling (re-fracking, increasing the number of fracture stages per well, multi-well directional drilling per well pad, etc, singly and/or in combination) leading to rapid growth in overall shale productivity.
- Marginal costs for shale were estimated at the USD50-80/barrel (bbl) (averaging USD62/bbl) range in 2014.
- We believe costs will fall as these technologies are adopted. Such a wide scope of improvement does not exist for deepwater, whose technology has been in existence for over 30 years.
- We believe marginal costs for shale may fall below that of ultra-deepwater, pushing the latter to become the global marginal cost producer in demand.
Bleak long-term outlook for deepwater orders.
- We believe the global oil oversupply could decrease in 2016 before reaching a more balanced market in 2017, with our Brent price forecasts being USD65/bbl and USD80/bbl for FY16F/FY17F.
- At USD65/bbl, we believe few deepwater projects would get the green light, thereby severely restricting the likely order flow.
- A USD80/bbl price of oil is economic for deepwater work, but the asset market is likely to take additional time to balance out before orders are placed.
- We slash our previously street-low FY15F/FY16F earnings by 51%/64% as we trim our margin assumptions and order win forecasts.
- Maintain SELL, with a lower SGD0.36 TP based on 0.6x P/BV (from 0.7x).
- Key risks are lower order flows and EBITDA margins.
Analyst: Lee Yue Jer, CFA
Source: http://www.rhbgroub.com/
