Offshore & Marine - UOB Kay Hian 2020-06-25: Looking To 2021 For A Slight Recovery


Offshore & Marine - Looking To 2021 For A Slight Recovery

  • Rig day rates and utilisation rates deteriorated in 1H20 and chances of a recovery in the O&M sector in the near term remain low in our view. The industry outlook remains challenging and new order flow may only re-surface in 1H21 in our base-case scenario. This reinforces our view that an upcycle is 2+ years away.
  • Maintain MARKET WEIGHT.

Oil prices have recovered but confidence has not for now.

  • Post the oil price crash seen in Apr 20, Brent oil prices have recovered by nearly 119% since the trough on 21 Apr 20. Despite the re-opening of economies globally, oil demand is likely to remain weak as the recovery in global air travel appears to be a mid-term prospect rather than a near-term one, while a potential second wave of COVID-19 infections presents downside risk to oil demand in the near term. As a result, we have low confidence in Brent remaining sustainably above US$45-50/bbl in the near term. Thus, oil companies are unlikely to resume capex spending.

Capex cuts

  • Entering 2020, the big five oil majors – BP, Chevron, Exxon, Shell, Total – had planned more than US$112b in capex. However, these numbers have been significantly reduced since the onset of the COVID-19 pandemic and the brief but damaging OPEC-Russia oil price war. These cuts ranged from a low of 20% for Shell to as much as a 30% cut for Exxon which was unveiled at its 1Q20 results announcement.
  • In total, the five majors have cut around US$29b for the remainder of 2020, or 25% lower than the original plans. The smaller oil & gas companies would have made similar adjustments to their capex as well and according to industry estimates, global upstream capex cuts ytd total US$37b-38b.

Oil and gas demand has collapsed in 2020.

  • OPEC+ expects global oil demand to contract by around 9mmbpd in 2020, from around 100mmbpd pre-crisis. Following on from the agreement in Apr 20 to cut 9.7mmbpd (or almost 10% of global supply) for the months of May and June, the cartel had been expecting to ease these cuts from July to 7.7mmbpd (or 8% of global supply) for the rest of the year as demand recovers. However, recent media reports indicate that the 9.7mmbpd cuts would remain for the next three months as macro conditions have not improved.
  • With an apparent second wave of infections having started in various countries, oil demand may not recover if lockdowns remain in place, or are reimposed in the case of certain parts of Australia, and travel bans and stay-home orders hit consumption.

No signs of thawing for cold-stacked rigs.

  • Globally, there are 304 inactive rigs now with 122 or 40% of these rigs being cold stacked. Although there are fewer cold-stacked rigs in Asia, the fact that three in five rigs are not working indicates an industry that is in a very parlous state at present.
  • In our view, it will take very bullish market conditions to reactivate the cold-stacked rigs given the time and cost required to bring them back up to fully operational standards. Seadrill for example, expects to scrap 10 of its cold-stacked rigs (mainly semi-subs) due to the lack of work prospects.

Nothing spared from the downdraft this year.

  • With the exception of mid-water semi-subs, utilisation levels for other types of assets have declined by an average of 9% ytd. On the day-rate front, the experience has been similarly negative with both mid-water semi-subs and jack-ups declining by 11% ytd; only drill ships witnessed a slight increase of 6% since the start of 2020.

Industry activity only likely to restart in earnest in 2021.

  • After a reasonably strong level of licensing activity in 2019, the viewpoint at the start of 2020 looked reasonably positive given the stable oil prices and a benign demand/supply scenario. However, this has clearly been derailed and the > 50 licensing rounds that were expected this year has largely fizzled out. As a result, given the long lead times necessary to negotiate rig charters, purchase equipment as well as obtain regulatory approvals, any tenders in the coming few months will have to be for work commencing in 2021 and beyond.

Continued growth in renewables remains medium- to long-term opportunity for Keppel and Sembcorp Marine.

  • According to Rystad Analytics, European capex on offshore wind is set to reach parity with oil & gas capex in 2021 and surpass it by 2022 as a consequence of both lower oil prices and increasing levels of offshore wind activity in Europe. Offshore wind capex in Europe surpassed US$10b in 2015 and has since ranged between US$10b-15b per year.
  • Annual capex levels are expected to rise from around $11.1b in 2019 to around $13.8b in 2020, $18.2b in 2021 and more than $22b in 2022. Conversely, upstream offshore oil and gas capex in Europe is expected to decline from more than US$25b in 2019 to less than US$17b in 2022.

Stock picks.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-06-25
SGX Stock Analyst Report BUY MAINTAIN BUY 7.150 SAME 7.150