Oil & Gas - DBS Research 2016-03-15: Sinking further?

EZION HOLDINGS LIMITED 5ME.SI SEMBCORP INDUSTRIES LTD U96.SI YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Oil & Gas - Sinking further?

4Q15 saw the realisation of the long anticipated impairment/provisions
More could be seen for Ezra, Cosco and Keppel in 2016
Ezion and Sembcorp Industries (SCI) remain our BUYs among Singapore O&G stocks

Most of the O&G companies reported disappointing 4Q15 results, save for Keppel, as a result of a wave of impairments and provisions, which swung Sembcorp Marine (SMM), Cosco, Mermaid Maritime (Mermaid) and PACC Offshore (POSH) to deliver substantial full year losses.
The range of impairments as a percentage of asset values has been rather wide: POSH made impairments that we estimate to equate to just over 10% of vessel values, while Mermaid saw impairments on both its subsea vessels and rigs at the associate level representing ~40% of asset values.
Still some, such as Pacific Radiance (PACRA), made no impairments as a result of low shipbuilding cost providing ample buffers.

We believe that Ezra is most likely to see impairments in 2016, as it has made none so far.
Keppel could be under pressure to make provisions for non-Sete Brasil projects of up to S$200m, amid rising deferment / cancellation risks.
Cosco continues to face cost overrun issues.
SMM seems to have made adequate provisions for non-Sete projects (S$280m in 4Q15) but risks of further provisions for Sete projects remain.
Meanwhile Ezion, Mermaid, PACRA and Yangzijiang are the least likely to see further impairments, after the recent round of aggressive write-downs.

In these difficult times, we have seen companies:
1. undertake cost-cutting measures,
2. defer vessel deliveries (PACRA, POSH, Ezion, EMAS Offshore), and
3. hatch plans to diversify beyond the oil & gas markets (Ezion and Vard).
We think companies that have adopted these strategies are better positioned to ride out the downturn.
Additionally, those with low gearing and little-or- no upcoming non-bank debt repayments, such as POSH and Mermaid, should be less at risk.

The recent rally of O&G stocks, alongside the bounce in oil prices could be short-lived in the absence of meaningful change in fundamentals.
A near term pull-back in oil prices is likely, as talks of output freeze may have hit a roadblock with Iran’s resistance to take part and refineries entering their maintenance period in Apr.
Our only BUY calls remain Ezion, SCI and Yangzijiang.

Pei Hwa Ho DBS Vickers | Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-03-15

BUY Maintain BUY 0.85 Same 0.85

BUY Maintain BUY 3.30 Same 3.30

BUY Maintain BUY 1.25 Same 1.25