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Offshore & Marine - UOB Kay Hian 2021-03-17: Very Small Green Shoots Emerging

Offshore & Marine - UOB Kay Hian Research | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4) SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Offshore & Marine - Very Small Green Shoots Emerging

  • The latest rig utilisation and day rates could indicate that the worst is over for the offshore marine industry. Oil & gas project commitments for the 2021-25 period are forecast to increase by 66% vs the prior five-year period, and the Brent forward curve has risen more than 22% in the past three months to US$55/bbl. More inactive rigs have also been removed from the market in 2021.
  • For now, we maintain MARKET WEIGHT on the sector with Yangzijiang Shipbuilding and Keppel Corp as our top picks.



Green shoots or a mirage?

  • Competitive utilisation rates for offshore rigs have risen strongly in the past few months. Specifically, utilisation rates for deep-water semis and jack-ups have risen 3% and 8% respectively, while on a year-to-date basis, day rates for mid-and deep-water semi submersibles have risen by 13% and 6% respectively.
  • While we caution that a few months’ worth of datapoints may not point to anything meaningful at present, the short-term trend is nevertheless positive.


Industry activity looking to pick up.

  • While demand for new drilling rigs will likely continue to be weak, demand for production assets appears to be strong for the next few years, which could have positive ramifications for both Keppel Corp and Sembcorp Marine.
  • According to Rystad Energy, 592 oil & gas project commitments will take place over the 2021-25 period – this is a 66% increase compared with 355 projects in the 2016-20 period, and higher than the 478 seen in the 2011-15 period (see chart in report attached below).


Oil price could potentially hit US$100/bbl in the next two years.

  • In 2020, the major oil-producing countries globally saw staffing levels decline by 7-26%; even Saudi Arabia was not spared as it saw a 6% decline in staffing levels. Post the precipitous 49% decline in oil industry capex over 2014-20, spending is forecast to resume over the next few years, albeit at a relatively slow rate of 4% CAGR over 2020-25.
  • The lack of human resources coupled with the lower capex spending could curtail oil supply (while demand recovers), and thus an oil price of US$100/bbl is not out of the question in the next 2-3 years. The Brent oil forward curve has risen from US$45/bbl to US$55/bbl for 2025 delivery in the past three months, and is thus more supportive of oil industry capex.


Maintain MARKET WEIGHT on offshore & marine sector.

  • Should activity in the oil & gas industry strengthen and lead to a revival in the offshore marine industry, we could see a cyclical upturn start in the next 6-12 months. This assumes that the current second or third wave of COVID-19 infections globally are dealt with in a reasonably quick manner, and the global vaccine roll-out is effective.
  • Our top picks in the sector have not changed:
    • Yangzijiang Shipbuilding, given our belief that it will benefit from continued new order flow in 2021; and
    • Keppel Corp due to its undemanding valuations and potential positive newsflow regarding the merger or divestment of its O&M business unit.


Promising outlook for potential oil demand recovery.

  • The positive news of effective vaccines in early-Nov 20, and their subsequent roll-out since then, should allow for global oil demand to recover in 2021. Already, oil prices have trended upwards towards US$70/bbl levels as OPEC+ has retained it tight grip on oil supplies, 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 in 2020 (see chart in report below). 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.


Inactive rigs – incrementally less of a hurdle

  • Inactive rigs – incrementally less of a hurdle if we look at the data from March vs January:
    • Inactive rigs as a percentage of total rigs have continued to come down, especially for semi-subs which saw the largest decline in Mar 21.
    • In the semi-sub market, there has been an overall decline in warm-stacked rigs and an increase in cold-stacked rigs – all without meaningful increases in actively drilling rigs. The same is also true of the jack-up market.
  • Since January, rigs have been taken out of the market, with 58 offshore rig sales (or 7.5% of the global rig fleet) recorded. Of the 58, 10 were converted to non-drilling applications, 12 are likely to remain active in the drilling fleet and a significant 36 rigs are bound for the scrap yards. Anecdotally, rigs have also been deployed for other uses such as offshore renewable projects or even launching rockets into space.


FY20 RESULTS REVIEW


Keppel Corporation (SGX:BN4):


Sembcorp Industries (SGX:U96):

Yangzijiang Shipbuilding (SGX:BS6):


Sembcorp Marine (SGX:S51):






Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-17
SGX Stock Analyst Report BUY MAINTAIN BUY 6.100 SAME 6.100
BUY MAINTAIN BUY 2.000 SAME 2.000
HOLD MAINTAIN HOLD 0.160 SAME 0.160
BUY MAINTAIN BUY 1.360 SAME 1.360


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