Offshore & Marine - UOB Kay Hian 2016-03-14: Global Bellwethers ~ When The Going Gets Tough, The Tough Get Going

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Offshore & Marine EZION HOLDINGS LIMITED 5ME.SI  NAM CHEONG LIMITED N4E.SI  KEPPEL CORPORATION LIMITED BN4.SI  EZION HOLDINGS LIMITED 5ME.SI 

Offshore & Marine – Global Bellwethers: When The Going Gets Tough, The Tough Get Going 

• We studied management comments in the recent 4Q15 results announcements of global oil-service bellwethers. 
• In 2015, the bellwethers were the first off the block to have adopted austerity measures to weather a deep downturn. 
• A second fall in oil prices has led to a double dip in E&P spending. Oil companies are constrained in E&P spending by significantly lower cash flows. It’s all about oil prices. 
• Our top BUYs remain Keppel Corp and Ezion Holdings while top SELLs are SMM and Nam Cheong. 
• Maintain MARKET WEIGHT. 

WHAT’S NEW 

• We examined management comments in the 4Q15 results announcements of global oil- service bellwethers seeking clues to the turning point of the current oil industry’s downturn, as well as its ongoing structural changes. 
• We draw the following key points: 

  •  A second fall in oil prices has sent the industry downturn into another tailspin. 

    • It’s really all about the oil prices. The second dip in Dec 15 has led to a cash conservation mindset among oil players, with project sanctioning becoming increasingly difficult. FMC Technologies remarked that projects were not gaining Final Investment Decisions (FID) even despite improved economics, a view echoed by Subsea 7. This was elaborated on by Technip, who pointed out that oil majors were focused on completing projects sanctioned prior to the downturn to unlock cash inflows from them. 
    • New projects were not a priority. Given the lower oil prices, cash is becoming tight among oil majors, especially for those who have decided to maintain their dividend policies. 

  •  When the going gets tough, the tough get going. 

    • In 2015 the bellwethers were the first off the block to have adopted austerity measures to weather a deep downturn. While the current challenging conditions may persist into 2017, the bellwethers are focused on managing areas within their control, such as continuing to improve upon operational and safety performance, streamlining the business and processes and cost reduction. 

  •  Downturn in Southeast Asia is lagging by 2-3 quarters. 

    • Gulfmark Offshore remarked that in terms of dayrate stability, Southeast Asia was lagging the Gulf of Mexico (GoM) and North Sea by two to three quarters. In the latter two regions, withdrawal of capacities had helped stabilise and in some cases, cause a rise in dayrates. This was not the case for Southeast Asia, where intense competition among regional players led to continued fall in dayrates. 
    • Our channel checks were quick to point out Swire Pacific, which had been aggressively reducing rates to secure contract work. SEA OSV market has typically been fragmented. Till players rationalise supply in the region, OSV players who predominantly operate in the region will continue to suffer from poor earnings. 

  •  Activity in SE Asia significantly down. 

    • A common theme among the bellwethers: Activity in SEA is significantly down. This can be seen from the sharp declines in operating margins and lower utilisation reported in their quarterly results. 
    • Given that the bulk of activity is driven by National Oil Companies (NOC) which partly fund their respective governments’ budget, their cash-strapped positions have resulted in what Schlumberger commented as “permanent activity declines”. 

ACTION 

 Maintain MARKET WEIGHT. 

• No change in our stock recommendations. With current share prices at cyclical trough valuations, many stocks are deep in value. However, the global O&G industry continues to be in a deep downturn. 
• Our top BUYs remain Keppel Corp and Ezion Holdings while top SELLs are SMM and Nam Cheong. 

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 to return activity levels to post-crash levels.

Nancy Wei UOB Kay Hian | Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-14

UOB Kay Hian Analyst Report BUY Maintain BUY 6.50 Down 6.60

BUY Maintain BUY 0.79 Same 0.79

SELL Maintain SELL 0.085 Same 0.085

SELL Maintain SELL 0.90 Same 0.90