Offshore & Marine - CIMB Research 2016-09-29: Capitalising on the placebo effect

Offshore & Marine - CIMB Research 2016-09-29: Capitalising on the placebo effect MERMAID MARITIME PUBLIC CO LTD DU4.SI EZION HOLDINGS LIMITED 5ME.SI  CSE GLOBAL LTD 544.SI 

Offshore & Marine - Capitalising on the placebo effect

  • OPEC members agree to cap production to range of 32.5-33mbbls/day. Positive on turnout and expect crude oil price to post positive knee-jerk reaction and rise.
  • No immediate ‘real’ positives in operations but offshore service operators to benefit first on improved utilisation while shipyards still struggle with rig supply glut.
  • Spending may still be capped by lacklustre demand-supply dynamics, notwithstanding going concern fears among the small caps in Singapore.

OPEC members surprise and strike deal

  • OPEC surprised by purportedly agreeing to an outline deal that limited production to a range of 32.5-33mbbls/day, close to the 32.7mbbls/day in Aug 16. Iran (c.11% of OPEC production) has been exempted from capping production, hence any cuts will likely have to be stomached by lead producer, Saudi Arabia (32% of production as at Aug 16). More details will be revealed in the next formal OPEC meeting in Nov-16.
  • If Iran’s production hits its targeted 4.2mbbls/day (3.66mbbl/s currently), we believe Saudi Arabia may only need to cut by 5% to a level close to Jan 16’s 9.98mbbls/day, keeping its c.30% market share.

Crude oil price could rally in the short term…

  • We believe there is no immediate ‘real’ effects on capex spending by oil majors given overall OPEC production seems to be unchanged. However, prices could rally in the short term as the turn of events hints that OPEC is seeing more urgency in rebalancing the market.

… but remain capped at least until late-2017

  • Prices could still remain capped below US$60/bbl given: 
    1. lacklustre demand growth, and 
    2. still elevated global inventories. 
  • According to the EIA’s Sep 16 Short Term Energy Outlook, production deficits will likely only occur from late-2017 when consumption growth trumps declining production. EIA believes global production surplus will hover at c.0.5mbbl in the next six months.

US shale still a real threat

  • US shale has a wide breakeven range of US$24-68/bbl. It is likely to turn on the taps once crude oil prices hit the sweet spot above US$50/bbl, providing downward pressure on crude oil prices. Such production can also be brought in swiftly given the high inventory of Drilled-But-Uncompleted (DUC) wells that the US can tap.

Maintain Underweight but stay alert for trading opportunities

  • While the curbs are encouraging, barring a material change to demand-supply dynamics, we expect the sector to continue being ignored on the local front, at least until going concern fears have dissipated. 
  • We are not turning bullish until more compelling catalysts emerge, such as order flows or deeper cuts in production. However, there are trading opportunities as the sector is trending at trough CY16 P/BV valuations – small caps average 0.26x and big caps c.0.86x. 
  • We expect shallow water O&M activities to be prioritised once spending returns and service operators to see improved utilisation. 
  • Shipyards may still struggle with rig orders given the supply glut situation. 
  • We favour safer names, like CSE Global and Mermaid Maritime for their strong balance sheets.

Highlighted companies 

CSE Global 

  • ADD, TP S$0.52, S$0.42 close 
  • Our flight-to-safety stock pick. 
  • Favourite in the small-cap space due to its strong balance sheet, steady margins and decent dividend yield.

Ezion Holdings 

  • HOLD, TP S$0.32, S$0.28 close 
  • Best bet to capitalise on any trading opportunities that emerge from the crude oil rally due to 
    1. its shallow water assets, 
    2. minimal near-term credit risk, and 
    3. valuation that is currently below historical trough.

Mermaid Maritime 

  • ADD, TP S$0.16, S$0.10 close 
  • We expect its third AOD jack-up rig contract with Saudi Aramco to be renewed. MMT swung into profitability in 2Q16, backed by better utilisation and higher revenue. This will continue in 2H16. 
  • The stock is cheap at 0.3x CY16 P/BV with the least credit risk given net gearing of c.0.1x.

Peer Comparison 

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-09-29
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.16 Same 0.160
HOLD Maintain HOLD 0.32 Same 0.32
ADD Maintain ADD 0.52 Same 0.52