Offshore & Marine Sector - UOB Kay Hian 2015-09-03: Bellwether Service Providers On Track In Aggressive Cost Cuttings.

Offshore and Marine Sector

Bellwether Service Providers On Track In Aggressive Cost Cuttings 

  • We lower our Brent oil price estimate for 2016 to US$67/bbl from US$72/bbl, but base our stock target prices on an oil price benchmark of US$60/bbl. 
  • We study management comments from 10 global bellwether service providers, and find them on track in their aggressive cost cutting. This is the new order to revive the profitability of the upstream oil & gas industry at lower oil prices of US$50-70/bbl. 
  • Our Singapore top stock picks remain SCI, Ezion Holdings and Triyards. 
  • Maintain MARKET WEIGHT. 


WHAT’S NEW 


 Revising 2016 estimate to US$67/bbl. 

  • A renewed decline in Brent crude prices in JulyAugust led to downward revisions of 7-23% in the 2016 Brent price forecasts by the 38 agencies/banks we track. The new 2016 consensus oil price is US$67.38/bbl, 6.4% lower our current estimate of US$72/bbl. Having widened beyond our 5% threshold tolerance, we revise our 2016 average oil price assumption from US$72/bbl to US$67/bbl. 
  • We keep our 2015 Brent crude assumption unchanged at US$61/bbl, despite a 4% decline in consensus from our current estimate of US$61/bbl to US$58.56/bbl. Earlier this week, we had lowered our stock target prices based on P/B multiples at US$60/bbl. 

 Fundamental oversupply stoked lower oil prices. 

  • Brent crude oil price continued its downward trend from July, declining 6.8% mom, due to renewed concerns on the existing supply glut and Iran's impending addition to global supply with the lifting of its nuclear deal. 
  • The collapse of China's stock market and its currency devaluation added to the negative sentiment, sending Brent oil price to a new 2015 low of US$42.55/bbl. The recent price rebound of 15.6% in end-August was mainly due to short covering. According to the IEA, fundamentals point to continued oversupply, and it expects the earliest balance to occur next year in 4Q16. The supply imbalance in 2Q15 was revised to 3.0mb/d by the IEA. 

 Adapt or die: Bellwethers cite anecdotal evidence companies are innovating to survive. 

  • Massive cost cutting (among the Singapore companies too) is the new order to revive the profitability of the upstream oil & gas industry at lower oil prices of US$50- 70/bbl. In the 2Q15 results conference by bellwether US oil and gas companies, management comments showed that operators were swift in cutting costs and embracing change to survive. Costs cuts of 14-25% are the norm to survive the downturn. 
  • Oil players are bringing down field development costs through innovation rather than price reductions alone. In particular, companies are more willing to adopt changes to survive, an unexpected change from the resistance seen when prices were high. 

ACTION 


 No change in stock recommendations. 

  • Maintain MARKET WEIGHT. Despite our steep target price cuts, there is no change in our stock recommendations. With current share prices at near-cyclical trough valuations, many stocks are deep in value. The global O&G industry still 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 slowly returning, oilfield services companies are expected to post poor earnings performance in 2015. A meaningful recovery might be seen only in 2016. 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 (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards. We recently upgraded Ezra to BUY following its announcement that Chiyoda – a 33%-owned associate of Mitsubishi Corp - is taking a 50% stake in subsea unit EMAS AMC. 

ASSUMPTION CHANGES / CATALYSTS / RISKS 


 Oil price the key risk. 

  • Two key risks in the sector are: 
    1. protracted low oil prices, and 
    2. another sharp fall in oil prices. 
    Both would significantly impede future capex spending, which needs to rise in order to return activity levels to post-crash levels.
UOB Kay Hian Offshore & Marine Sector Stock Recommendation

Nancy Wei | Foo Zhiwei | http://research.uobkayhian.com/ UOB 2015-09-03
BUY Maintain BUY 1.05 Same 1.05
BUY Maintain BUY 0.81 Same 0.81
BUY Maintain BUY 4.69 Same 4.69


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