Offshore & Marine - UOB Kay Hian 2021-01-22: Equilibrium Delayed


Offshore & Marine - Equilibrium Delayed

  • COVID-19 has undoubtedly dented the recovery prospects of both the O&G and the O&M industries. In our view, the sector outlook for 2021 is not bright: two in five rigs in aggregate remain out of work, day rates and utilisation levels for operating rigs remain depressed, and O&G industry capex is forecast to recover slowly.
  • Maintain MARKET WEIGHT on the sector with Yangzijiang Shipbuilding (SGX:BS6) and Keppel Corp (SGX:BN4) as our top picks.

Offshore & Marine Industry activity slowed down significantly in 2020

  • Industry activity slowed down significantly in 2020 with a 56% y-o-y decline in licensing rounds to only 43 vs 98 in 2019. According to Rystad Energy, awarded acreage was the lowest since 2002 at just over 324,000km2. In terms of size, acreage awards were the hardest hit in Asia at only one-quarter of 2019 levels. As a result, we believe that drilling activity in the coming 12-18 months will be meaningfully curtailed, thus supporting our view that orders for drilling rigs will continue to be weak.

Oil industry capex.

  • After slashing capex by 49% over 2014-20, the oil & gas (O&G) industry is forecast to resume spending by only 4% CAGR over 2021-25. This is lower than the 6% CAGR that we had previously forecast in Jan 20 for the 2020-25 period. This rate of increase is one-third that of the 12% CAGR seen over 2010-14 and may thus only have a small positive effect on Singapore yards going forwards.

Rig day rates and utilisation levels weakened further in 2020.

  • All asset classes experienced weaker day rates as 2020 wore with COVID-19 curtailing activity. Utilisation rates did not do any better, stagnating at 60% for jack-ups and 40% for deepwater semi-subs. Importantly, uncontracted rigs still make up two-fifths of the global fleet.

Promising outlook for potential oil demand recovery

  • The positive news of effective vaccines in early-Nov 20 may allow for global oil demand to potentially recover in the latter half of 2021. In our view, oil prices should gradually trend upwards towards US$55-60/bbl levels as financial positioning normalises and OPEC+ manages oil supply on a month-to-month basis, with an eye on supporting higher prices, and its own fiscal balances.

Oil demand to rebound in 2021

  • At the start of 2020, oil demand had been expected to grow by between 1-3%. However, COVID-19 significantly affected energy demand, erasing nearly 9mmbpd of oil demand globally. However, with expectations of a global economic recovery in 2021, the US Energy Information Administration (EIA) expects crude oil and liquids demand to experience a v-shaped rebound in 2021 with oil demand rising by nearly 6mmbpd.

Revival of the global rig market postponed.

  • Heading into 2020, the number of active offshore rigs had been rising, giving us and the market some hope that the industry was showing some signs of revival. However, the COVID-19 pandemic dashed those hopes with active rigs and utilisation declining by 18% and 11ppt respectively over the course of Mar-Dec 20.

Inactive rigs still a major hurdle.

  • Across all asset classes, the number of inactive rigs remains high. Jack-ups appear to be better placed with ~40% of global jack-ups being inactive vs drillships at > 50%. However, with the general industry experiencing at least two in five rigs being inactive, any recovery in the sector will need to first see either:
    1. movement of rigs from warm-stacked status to active; or
    2. higher levels of scrapping of cold-stacked rigs.

EV sector’s growing impact on transportation fuels.

  • In our view, higher adoption rates, wider charging infrastructure and greater consumer choices for electric vehicles (EV) may be soon as 2025.

Maintain MARKET WEIGHT on the sector, with slow recovery forecasted in FY21.

  • COVID-19 has undoubtedly dented the recovery prospects for the offshore marine (O&M) industry that, at the beginning of 2020, looked to be “around the corner”. In our view, a recovery may only see green shoots in 2022, assuming that the current second or third wave of COVID-19 infections globally is dealt with in a reasonably quick manner, and the global vaccine rollout is effective.
  • Top picks in the sector are:
    1. Yangzijiang Shipbuilding (SGX:BS6) given our belief that it will benefit from continued new order flow in 2021; and
    2. Keppel Corp (SGX:BN4) due to its undemanding valuations and potential positive newsflow regarding the merger or divestment of its O&M business unit.

Offshore & Marine Stocks FY20 Results Preview

Keppel Corp (SGX:BN4)

  • We expect decent 2H20 results from Keppel Corp’s non-O&M businesses as we expect these business units to be profitable in 4Q20, and continuing on from the positive trend that was guided by Keppel Corp’s management during its 3Q20 business update in Oct 20. As a result, we forecast revenue of S$6.1b and a slight net profit of S$74m vs consensus which is expecting a small loss of S$12m.
  • See Keppel Corp Share Price; Keppel Corp Target Price.

Sembcorp (SGX:U96)

  • A loss for 2020 should not be a surprise to the market given that Sembcorp Industries had issued a profit warning on 7 Dec 20. We forecast that Sembcorp Industries will generate S$6.7b in revenue but suffer a loss of S$167m principally due to:
    1. its share of losses from Sembcorp Marine; as well as
    2. impairments totalling S$89m which was disclosed in its profit warning.
  • Given the impact of the COVID-19 pandemic on its business in 2020, the market should not be surprised if Sembcorp Industries discloses further impairments at its annual results.
  • See Sembcorp Share Price; Sembcorp Target Price.

Yangzijiang Shipbuilding (SGX:BS6)

Sembcorp Marine (SGX:S51)

  • We expect Sembcorp Marine to report revenue of S$2.04b and a loss of S$259m given that the company’s overheads continue to be high vs its current revenue-generating capability. In addition, its financial position will likely deteriorate further in 2021 if the company’s lack of orders persists, despite its full capacity at its yards, and its repairs & upgrades business segment remaining busy.
  • See Sembcorp Marine Share Price; Sembcorp Marine Target Price.

See the 11-page PDF report attached below for complete analysis.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-22
SGX Stock Analyst Report BUY MAINTAIN BUY 6.300 SAME 6.300