Regional Oil & Gas Sector - UOB Kay Hian 2015-12-09: A Year To Forget

Offshore & Marine - UOB Kay Hian Research 2015-11-27: Global Oil-Service Bellwethers ~ The Price of Stability Offshore & Marine SEMBCORP INDUSTRIES LTD U96.SI  EZION HOLDINGS LIMITED 5ME.SI  TRIYARDS HOLDINGS LIMITED RC5.SI  SEMBCORP MARINE LTD S51.SI  NAM CHEONG LIMITED N4E.SI 

Oil & Gas – Regional: A Year To Forget 

  • We reduce our 2016 Brent crude oil price estimate to US$57/bbl from US$63/bbl while our 2015 estimate remains unchanged at US$56/bbl. Our stock target prices are based on US$60/bbl. 
  • In 2015, stock prices collapsed across the board. Today, Malaysian stocks are still the priciest while Indonesia stocks are the cheapest. 
  • Top BUYs: SCI SP, EZI SP, ETL SP, DLG MK. 
  • Our top SELLs: SMM SP, BARAKAH MK. 
  • Maintain MARKET WEIGHT. 



WHAT’S NEW 


• No cap to OPEC production target. 

  • OPEC held its 168th meeting last Friday, where it disregarded any notion of a production limit that would support oil prices. Effectively, the cartel has no cap to its production target, as members descend into a free-for-all to capture market share. 
  • As of Oct 15, OPEC’s production stood at 31.8mb/d, with Iran set to contribute at least another 0.5mb/d by 2016. 

• Reducing 2016 oil price assumption to US$57/bbl. 

  • We revise our 2016 oil price assumption to US$57/bbl and keep our 2015 assumption unchanged at US$56/bbl. The revision hinges on two factors: 
    1.  estimate downgrades post-OPEC meeting, and 
    2.  removal of estimates older than 180 days. 
  • The removal of estimates reduces our organisation count from 38 to 28, and was the primary cause for the lower estimate for 2016. Estimates for 2017 (by 19 organisations) are patchy, but currently point to an average of US$64/bbl. 
  • We re-iterate that these estimates are average prices for the year, not year-end prices. Our stock target prices are based on US$60/bbl. 


STOCK PERFORMANCE ROUND-UP 


• Malaysia is still the priciest while Indonesia is now the cheapest. 

  • Brent oil price has fallen by 56% since Oct 14 to US$40.98/bbl. Based on our stock universe, Singapore oil & gas related stocks have fallen by 59%, while Malaysian stocks have dropped by a lesser extent of 35%. Indonesian stocks - down by 88% - are the hardest hit. 
  • Today, Malaysian stocks remain the priciest with a 2016F P/B of 1.5x (1.2x excluding Dialog) compared with Singapore stocks’ 2016F P/B of 0.6x (oil services – 0.4x) and Indonesian stocks’ 2016F P/B of 0.2x. 

• Singapore stocks mirror global peers. 

  • Singapore companies are regional/global players. 
  • We are seeing a paradigm shift in Singapore rig builders’ valuations. Keppel and SMM currently trade at 2016F P/B of 1.0x and 1.2x respectively. SMM’s P/B has dipped below its 2008/09’s trough P/B of 1.4x. 
  • Placed in perspective against the average 0.6x 2016F P/B for South Korean and Japanese offshore heavy-engineering shipyards, SMM is trading at a large premium and is the most expensive offshore heavy-engineering shipyard stock in the region. 
  • Keppel’s and SMM’s premium valuations started in 2004 on the back of the oil super-cycle. Prior to 2004, SMM - primarily a ship-repair yard - traded at a lower average P/B of 1.26x (1997-2003). During the Asian financial crisis, SMM’s P/B valuation crashed to 0.85x. 

• Share prices of Singapore’s small- and mid-cap oil service stocks are trading at close to cyclical trough valuations of 0.4x...

  • ..., but the industry remains challenging for 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 have dominance in niche assets. 

• Malaysian stocks are still the most expensive. 

  • Petronas incurred RM49.7b of capex in 9M15, on track to fall within the RM70b capex budgeted for 2015 (estimated 15% cut from 2015’s original budget; 2014: RM64.6b). Based on this, Petronas would have spent RM296b since 2011, in line with its RM300b 5-year spending plan over 2011-15. Petronas has allocated RM350b capex over the next five years (2016-20), higher than the previous RM300b spending plans. Although no breakdown has been given on its future capex, we believe there appears to be a focus from upstream exploration to D&P/downstream projects. This is because Petronas remains primarily focused on three mega projects: 
    1. Pengerang (RM90b capex through 2019), 
    2. a Canadian liquefied natural gas (LNG) project (reportedly costing US$36b, with part of it involving a liquefaction plant in Pacific NorthWest to cost US$11b, target start-up by 2019) and, 
    3. two floating LNG projects (operational start-up by 2016 and 2018 reportedly costing US$4b-5b). 
    Hence, at this juncture we do not see Petronas’ capex direction as a catalyst for the upstream-centric sector. 

• Indonesia is hardest hit. 

  • Indonesia’s upstream O&G – like the rest of the world – has been hard hit by capex cuts. In addition, floundering government regulation has added to its woes. As a result, Indonesian companies are hardest hit. 
  • On the capex front, E&P activities have predominantly been driven by international oil companies’ (IOCs) spending, which in 2016 is expected to be lower than 2015’s. Official numbers have not yet been released. 
  • While Pertamina is raising its capex by +36% to US$6.0b for 2016, we expect actual spending to be lower based on the company’s track record. Of its US$4.4b spending budgeted for 2015, only 66% was spent (as of Oct 15). The same could be seen in 2014, during which only 72% of its budget of US$7.85b was spent. 
  • On the regulation front, uncertainty over PSC extensions - since the disbandment of upstream regulator BP Migas – is deterring IOCs from embarking on new projects. We do not see a major upswing in Indonesia offshore E&P activity in 2016. 


ACTION 


• Singapore. 

  • Our top stock picks remain Sembcorp Industries (SCI SP/BUY/Target S$4.05), Ezion Holdings (EZI SP/BUY/Target: S$1.01) and Triyards Holdings (ETL SP/BUY/Target: S$0.88). SCI is currently facing contract cancellation headwinds at Sembcorp Marine (SMM), but continues to expand its utilities business. 
  • Our top SELLs remain as Sembcorp Marine (SMM SP/SELL/Target: S$1.69) and Nam Cheong (NCL SP/SELL/Target: S$0.12)

• Malaysia. 

  • Our top SELL is Barakah Offshore Petroleum (BARAKAH MK/RM0.89/Target: RM0.55). 
  • Our sole BUY call is Dialog Group (DLG MK/RM1.60/Target: RM1.80). 

• Indonesia. 

  • Maintain HOLD on Wintermar (WINS IJ/Rp165/Target: Rp260) and Logindo (LEAD IJ/Rp135/Target: Rp250) in view of their very low 2016F P/B of 0.2x. 


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 pre-crash levels.



Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | Kong Ho Meng UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-09
UOB Kay Hian Analyst Report BUY Maintain BUY 4.05 Same 4.05
BUY Maintain BUY 1.01 Same 1.01
BUY Maintain BUY 0.88 Same 0.88
SELL Maintain SELL 1.69 Same 1.69
SELL Maintain SELL 0.12 Same 0.12


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