Offshore & Marine - CIMB Research 2016-12-05: Oil circular reference

Offshore & Marine - CIMB Research 2016-12-05: Oil circular reference Offshore & Marine MERMAID MARITIME PUBLIC CO LTD DU4.SI CSE GLOBAL LTD 544.SI SEMBCORP MARINE LTD S51.SI

Offshore & Marine - Oil circular reference

  • We project a higher crude oil price range of US$45-60/bbl in 2017F.
  • However, we view a price of above US$60/bbl as unlikely in view of the new US “Energy Independence” policies that could numb market-rebalancing efforts.
  • We foresee that shallow water P&M activities will be prioritised, with OSV players first to see improved utilisation. Yards are likely to lag due to asset glut.
  • We upgrade sector from Underweight to Neutral, largely on valuation grounds.
  • We like CSE Global, Ezion and MMT for their healthier balance sheets and/or ability to survive uncertain times, in our view. For large caps, we prefer Sembcorp Marine.

Politics and oil simplified, crude oil circular reference ensues 

  • We believe, uncertainty posed by the new Trumponomics vow that the US will be energy independent could accelerate OPEC’s output ceiling of 32.5mmbbls/day and NonOPEC’s cuts of 600kbbls/day from Jan 2017. This would lead to production deficits, driving prices above 2016’s average of US$43.5-44.9/bbl, in our opinion. 
  • But prices above US$60/bbl could incentivize both shale and other global production; moderating the deficit quantum, and capping price. Thus, the US$45-60 crude oil price range is possible, in our view.

Shallow-water asset owners before yard players 

  • In our view, the primary beneficiaries of the price rally would be the E&P players, given the higher prices for their products. Thereafter, we view shallow-water OSV players as likely first-tier beneficiaries, as production and maintenance activities are accorded priority over exploration work in the early part of sector recovery. 
  • Yards (for both rigs and vessels) however, may face a protracted winter, given that there are still an estimated 179 rigs, 432 AHTS/AHT and supply fleet global order book to be drawn down.

Downside risks largely priced in, especially for small-mid caps 

  • We view the discounts accorded to both large-cap (0.95x 1 year forward P/BV) and small-mid cap stocks (0.41x 1 year forward P/BV) as the street having priced-in potential default risks for the sector. 
  • But there could be better scope for tactical trades in smallmid-cap stocks as recent re-rating for large-caps seems to have penciled in order recoveries, which is unlikely to be in the near-term, in our view.

Upgrade sector call to Neutral 

  • On a valuation basis, we believe that in a worst-case scenario, share prices could stagnate at current levels, rather than falling further (which the previous Underweight call implied). However, a re-rate to an Overweight will be overly enthusiastic as we believe there are still significant uncertainties in the market namely: 
    1. counteractive policies of OPEC, Non-OPEC and the US that result in volatility in crude oil prices; 
    2. the asset supply glut that will cap significant DCR escalations for asset owners; and 
    3. anaemic global demand.

Prefer small- to mid-cap picks like Ezion, MMT and CSE Global 

  • Given the better risk-to-benefit ratio, in our view, we prefer the small- to mid-cap space for sector re-rating. 
  • We like MMT and CSE Global for their healthy balance sheets and trough valuations. 
  • We also favour Ezion for being positioned well in the value chain to benefit from heightened P&M activities. 
  • In large caps, we like SMM as a pure proxy to the cycle, and would take profits in Keppel Corp as we think its current valuation implies that O&M is trading at 2.9x CY16F P/BV and 26x CY17F P/E reflecting a super cycle.

Highlighted companies 

CSE Global 

  • ADD, TP S$0.47, S$0.44 close 
  • Offers a healthy ROE of 9.3%, dividend yield of 6.6%, steady cashflow generation and a healthy balance sheet.

Mermaid Maritime 

  • ADD, TP S$0.17, S$0.14 close 
  • Boasts a stable balance sheet, with minimal gearing (0.02x in 9MFY16) and is churning positive operating cash flows at low levels of vessel utilisation. Still attractive at 0.4x FY17F P/BV, in our view.

Sembcorp Marine 

  • HOLD, TP S$1.40, S$1.47 close 
  • Large-cap pure proxy to the cycle. We are positive on the divestment of its 30% stake in Cosco Shipyard Group, which will remove the overhang of erratic associate contributions, in our view.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.17 Same 0.17
HOLD Maintain HOLD 1.40 Same 1.40
ADD Maintain ADD 0.47 Same 0.47