Offshore & Marine - UOB Kay Hian 2020-01-17: Approaching Equilibrium; While Utilisation & Dayrates Have Improved, New Orders Have Yet To Manifest

KEPPEL CORPORATION LIMITED (SGX:BN4) SEMBCORP MARINE LTD (SGX:S51) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Offshore & Marine - Approaching Equilibrium; While Utilisation & Dayrates Have Improved, New Orders Have Yet To Manifest

Our analysis of the global oil & gas sector and the global rig market indicates that while there have been some positive developments, a new rig-building upcycle is some years away due to the excess supply of such assets. Given recent order wins, we see the offshore wind sector presenting opportunities while the Electric Vehicles sector does not yet present a threat to oil demand.
We upgrade SEMBCORP MARINE (SGX:S51) to HOLD and maintain MARKET WEIGHT on the sector.
KEPPEL CORPORATION (SGX:BN4) remains our top pick.

After slashing capex by 43% over 2014-16, the oil & gas industry is forecast to resume spending by 6% p.a. over 2020-25. While this rate of increase is less than the 12% p.a. seen over 2010-14, this should nevertheless benefit Singapore yards as they are exposed to both the exploration and production segments of the upstream oil & gas industry.

Brent oil’s steady trading range of US$55-60/bbl in recent months and its three-to five-year forward oil prices are at levels where offshore oil projects can generate decent project IRRs and thus be supportive of the offshore & marine (O&M) industry.
We highlight that oil discoveries globally have slowed down and human resources have been curtailed in recent years. Coupled with the 2014-16 capex crunch, these factors could lead to a supply slowdown in the medium term, thus squeezing oil prices upwards.

Industry activity did not slow down in 2019 as we witnessed a higher level of licensing activity compared with the last several years, driven by oil price stability. In 2020, licensing activity – and therefore future drilling activity – should remain elevated globally with more than 50 licensing rounds expected.

On a positive note, 2019 saw day rates increasing for semi-subs, utilisation rates improving across most asset classes, and some warm-stacked rigs being reactivated. On a negative note, however, day rates did not increase for jack-ups while semi-sub day rates were volatile in 2019.
Importantly, uncontracted rigs still make up nearly a quarter of the global fleet.

Looking at the growth in the offshore wind sector and order wins of Keppel Corporation and Sembcorp Marine in 2019 totalling nearly S$1b, we continue to see this sector as an opportunity for both companies with a total addressable market of about US$300b.
As a threat, the Electric Vehicles sector’s impact on transportation fuels will likely be felt only towards the end of this decade, in our view.

We upgrade Sembcorp Marine to HOLD from SELL and upgrade our fair value to S$1.40/share using 1.3x P/B which is a 20% and 50% discount respectively to its 5-year and 10-year average P/B. See report: Sembcorp Marine - The Worst Appears To Be Behind Us.
Our top pick in the sector remains Keppel Corporation (BUY/Target: S$7.61, based on SOTP-valuation), which is trading at an undemanding -1SD below its historical P/B of 1.5x. See Keppel Corporation - A Year Of Transformation.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-01-17

SGX Stock Analyst Report BUY MAINTAIN BUY 7.610 SAME 7.610

HOLD MAINTAIN HOLD 1.400 SAME 1.400

BUY MAINTAIN BUY 1.460 SAME 1.460