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

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 


Wide scale impairments. 

  • 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. 


More to come? 

  • 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. 


Launching the lifeboats. 

  • 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. 


Does the rally have legs? 

  • 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


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