Offshore & Marine - UOB Kay Hian 2015-11-09: IEA Changes Its Stance; Now Expects A Longer Oil Slump With Iran’s Arrival

Offshore & Marine - UOB Kay Hian Research 2015-11-09: IEA Changes Its Stance; Now Expects A Longer Oil Slump With Iran’s Arrival Offshore & Marine SEMBCORP INDUSTRIES LTD U96.SI  EZION HOLDINGS LIMITED 5ME.SI  TRIYARDS HOLDINGS LIMITED RC5.SI 

Offshore & Marine – Singapore IEA Changes Its Stance; Now Expects A Longer Oil Slump With Iran’s Arrival 

  • WE maintain our oil price estimates for 2015 and 2016 at US$56/bbl and US$63/bbl respectively. 
  • The IEA has changed its stance and now anticipates oil demand-supply to balance beyond 2016, with the inclusion of Iran. 
  • A recent US survey of 3,000 industrial leaders working at the highest level highlights oil price stability for at least 6-12 months as the common requirement for a return of E&P spending. 
  • Our Singapore top stock picks remain SCI, Ezion Holdings and Triyards
  • Maintain MARKET WEIGHT. 



WHAT’S NEW 


 Maintaining 2015-16 oil price estimates at US$56/bbl and US$63/bbl. 

  • This is premised on mean estimates from our list of 38 banks/agencies remaining relatively unchanged for October and below our threshold of 5% change upwards/downwards from our current assumptions. The mean estimates for 2015 and 2016 were US$56.33 (+0.6%) and US$62.15 (-1.3%) respectively. 

 Iran pushes IEA’s demand-supply balance forecast beyond 2016. 

  • In its latest monthly report, the French agency amended its forecast for the market to balance from 3Q16 to beyond 2016. The shift was attributable to the incorporation of Iran into the supply equation, as well as a downward reduction in 2016 demand growth from 1.4mb/d to 1.2mb/d, citing a weaker economic growth outlook from the IMF. Iran’s oil supply is expected to reach the market by early-16 and is anticipated to be at least 0.4mb/d – which already has committed buyers. While small, the IEA highlighted that an addition of 0.6mb/d from Iran would tilt market equilibrium in 2H16 into a renewed stock build of 1.1mb/d. 

 Current imbalance implied at 1.6m b/d. 

  • The report noted the preliminary estimate of demand in China was 11.3m b/d in August, almost a double-digit yoy growth. This was more robust than suggested by the ailing macro-economic figures being reported. As such, 3Q15 demand was raised from 95.0mb/d to 95.2mb/d. Total supply for 3Q15 was raised from 96.5mb/d to 96.8mb/d, owing to higher output from the Americas, and OPEC, which rose from 31.57mb/d to 31.72mb/d. As such, current imbalance is implied at 1.6mb/d, a 0.3mb/d increase over the 1.3mb/d reported last month. 

 Industrial survey highlights price stability as key for return to normalcy. 

  • A US survey of 3,000 industrial leaders working at the highest level (see chart on right for breakdown) was recently conducted by Oil & Gas 360. It highlighted oil price stability as a requirement for a return of exploration and production (E&P) spending, with a stability period of at least 6-12 months required in order for oil majors to commit to higher capex. 
  • We find this a common theme among our conversations with local offshore support vessel (OSV) owners, who further opined that activity would improve even if prices stabilised at current levels. Therefore, assuming Brent crude oil price had started stabilising at the US$50/bbl level since Sep 15, a return to pre-crisis capex spending levels would occur in 2017 at the earliest. That said, future activities are unlikely to generate the same asset demand as pre-crisis levels, given the efficiency gains achieved thus far. 

 Brent at US$63-88 to signal start of oil demand pick-up. 

  • The majority of participants surveyed on what oil price level would kickstart a new hiring trend opined a WTI level of US$60-70. 
  • A reduction in capital assets’ utilisation and increase in efficiency gains have resulted in the reduction of headcounts across the board. With existing capacity underutilised, renewed hiring would signal the point where oil demand picks up. 
  • Respondents polled replied as follows: 
    1.  45% of respondents said at WTI of US$60-70, 
    2.  37% said at WTI of US$70-$80, 
    3.  8% said at WTI of US $80-$90, 
    4.  3% responded with other price ranges. 
  • Taking the historical Brent premium (to WTI) of US$3-18 for 2015, the consensus level of WTI US$60–70 translates to a Brent range of US$63-88. This assumes the US remains unable to export its oil inventory. 


ACTION 

  • Maintain MARKET WEIGHT. 
  • We retain our stock recommendations and maintain MARKET WEIGHT on the sector. Share prices of small- and mid-cap oil service stocks are trading at close to cyclical trough valuation of 0.5x, but the industry remains challenging in the next 9-12 months. However, current low stock valuations present an opportunity to accumulate quality names. 
  • We expect outperformance in the long run when the downturn of the O&G industry has run its course. 
  • We prefer names with strong balance sheets and with dominance in niche assets. 
  • Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards

ASSUMPTION CHANGES / CATALYSTS / RISKS 


 Oil price the key risk. 

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


Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-09
UOB Kay Hian Analyst Report BUY Maintain BUY 4.50 Same 4.50
BUY Maintain BUY 1.05 Same 1.05
BUY Maintain BUY 0.88 Same 0.88

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