Offshore & Marine - Maybank Kim Eng 2016-06-03: Hesitant to Turn Positive despite USD50/bbl Oil

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KEPPEL CORPORATION LIMITED BN4.SI  SEMBCORP MARINE LTD S51.SI  SEMBCORP INDUSTRIES LTD U96.SI  EZION HOLDINGS LIMITED 5ME.SI  PACC OFFSHORE SVCS HLDG LTD U6C.SI 

Offshore & Marine - Hesitant to Turn Positive despite USD50/bbl Oil

Oil near USD50/bbl but industry players not excited

• We sieved through 1Q16 results transcripts of international rig and OSV owners. We wanted to gauge if their sentiments have changed following Brent’s rebound from its USD28/bbl low in mid-Jan to near USD50/bbl. We remain bearish after going through their outlook as most do not expect a meaningful recovery in activities before 2017. 
• Not time to turn positive on the builders if their clients continue to be restrained. 
• Maintain SELLs on Keppel (KEP SP, TP SGD4.42), Sembcorp Marine (SMM SP, TP SGD1.00) and Sembcorp Industries (SCI SP, TP SGD2.35). 
• For exposure, asset owners such as Ezion (EZI SP, TP SGD0.72) and PACC Offshore (POSH SP, TP SGD0.42) are likely survivors and expected to recover ahead of asset builders.

Oil companies seeing cost cuttings through in 2016

• Asset owners noted that oil companies’ 2016 budgets are already set and the latter will focus on completing cost reduction adjustment plans for a lower oil price environment. Unless there is further recovery and stronger confidence on oil price sustainability, there is little hope for a positive change in activities in 2016. 
• Diamond Offshore said that clients are still looking to cut capex while OSV owner, Tidewater would be surprised if the market shows a meaningful improvement in the next 24 months. 
• Nevertheless, all players still slipped in an optimistic statement on the healthy long-term fundaments of the industry and an eventual recovery from balancing supply-demand.

Surplus jackups, 6th-gen floaters most distressed

• Transocean’s view that the jackup market is deteriorating because of excessive supply is also echoed by Noble. 
• In addition both Transocean and Diamond highlighted that more 6th-gen floaters are being marketed for sale and this asset segment is most distressed. 
• We suspect that some of these units could be the Sete Brasil ones. Seadrill also stressed that it will not take delivery of any newbuilds unless it has a bankable contract, which is likely the intention of most rig owners. Therefore yards may have to continue delaying deliveries.

Disconnect stock price with oil price

• We believe that the lagged effect between oil price and return in activities will be more pronounced in this round of recovery. Investors should disconnect oil services players’ stock price with oil price as there are no visible signs that the recent oil bounce would filter through to earnings opportunities yet. 
• Instead, we suspect asset impairments are not all done, and could persistently upset share prices in the next few quarters.

Offshore & Marine Stock Valuations

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-03

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 4.42 Same 4.42

SELL Maintain SELL 1.00 Same 1.00

SELL Maintain SELL 2.35 Same 2.35

BUY Maintain BUY 0.72 Same 0.72

BUY Maintain BUY 0.42 Same 0.42