Oilfield Service Providers - DBS Research 2019-04-12: Tide Is Turning For Offshore

SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51) EZION HOLDINGS LIMITED (SGX:5ME) PACC OFFSHORE SVCS HLDG LTD. (SGX:U6C)

Oilfield Service Providers - Tide Is Turning For Offshore

Worst is over; firmer signs of recovery in the offshore sector.
Headline supply of offshore rigs and Offshore Supply Vessels (OSV) is overinflated; marketed utilisation set to rebound.
Reversal in day rates for offshore rigs expected to gain traction in 2020-2021; OSV to follow suit in 2021-2022.
Recommend BUY on China Oilfield Services Limited (COSL), Sembcorp Marine, Serba Dinamik, Sapura Energy.

Brent crude oil prices have again broken the psychological US$70/bbl barrier recently. YTD in 2019, Brent crude oil price has climbed 30% to average around US$64/bbl.
We still maintain our forecast that Brent crude oil price will average around US$70/bbl (at the higher end of our US$65-70/bbl range forecast) in 2019, implying a stronger second half.
Overall, we believe positive market developments outweigh negative catalysts for oil at this point of time. 2020 should be a similar story. This should be positive for oilfield service providers in the region.

Halliburton and Schlumberger have recently expressed optimism on the recovery in international markets, as additional investments are mandatory to simply maintain global crude oil production flat at current levels. Major offshore drillers and OSV players like Transocean, Seadrill and Tidewater are seeing healthier tender activity, especially on the deepwater front.
Additionally, asset owners are also noticing strong interest from customers to reactivate high-specification assets that are suitable for harsh environments.

Offshore activity gathered good traction in 2018, with the number of offshore greenfield projects sanctioned surging to 96 (+55% y-o-y). This suggests a consequent increase in offshore capital spending in 2019 and beyond, as capital from sanctioned FIDs (final investment decisions) filter through into contracts.
In 2019, FID sanctioning activity is expected remain firm, and expand by 15%, according to Rystad Energy, supporting multi-year growth in offshore capital investments.

Upstream players will increasingly turn to offshore E&P, as the ROI on global shallow water and deepwater resources is now comparable to both conventional and unconventional onshore plays. Offshore breakeven prices have decreased by around 40% since 2014.
Today, the average offshore breakeven oil price for offshore oil is consistently below US$50/bbl, with breakeven oil prices for the global supermajors ranging between US$30- US$40/bbl. This compares positively against unconventional plays in the US, which had an average breakeven oil price of US$40-50/bbl in 2018.

Coupled with shrinking returns on US shale projects, we believe upstream players could divert more capital into offshore projects. A multitude of technical problems in Shale have arisen as
1. infill drilling creates interference between parent and child wells,
2. as drilling shifts towards lower tier acreage, and as
3. the growth in lateral length and proppant per stage starts to plateau, according to Schlumberger.

Total deepwater capital expenditure is expected to reach nearly US$60bn by 2022, up from about US$50bn, implying a healthy CAGR of 4.7% in the next four years, according to Woodmac. Although offshore projects are much more capital-intensive, they offer meaningful portfolio diversity, and hold the potential for gargantuan discoveries, in contrast to shale which tends to experience faster depletion of reserves.
Deepwater projects can offer more compelling returns, as E&P players can utilise subsea tie-backs to maximise the processing capacity on existing platform infrastructures.

We expect global marketed utilisation of rigs to approach 80% in 2021 from 65% in 2018, which will help bolster rig day rates in 2020-2021. A higher contracted rig count and increase in offshore oil and gas production will augment OSV utilisation.
However, meaningful day rate improvement for OSVs should come slightly later – likely in 2021-22 timeline earliest – owing to the more dramatic glut in OSV market and time lag between offshore capex cycle recovery and changes in OSV demand.

BUY offshore service providers with healthy balance sheet, superior fleet quality, and/or extensive deepwater expertise. Our top picks in the offshore space include China OilField Services Ltd (COSL) (Target Price HK$10.20; +18%), SEMBCORP MARINE LTD (SGX:S51) (Target Price S$2.40; +42%), Serba Dinamik (Target Price RM5.70; +50%) and Sapura Energy (Target Price RM0.41; +14%).
Other well-positioned beneficiaries include Transocean, Hilong, KIMHENG OFFSHORE & MARINE (SGX:5G2). In addition, we continue to like onshore play – Anton (Target Price HK1.60; +33%), underpinned by rising China and Iraq capex.
See attached 36-page PDF report for detailed analysis.