Offshore & Marine Stocks 1H21 Results Preview - UOB Kay Hian 2021-07-07: Industry Conditions Improving, Albeit At A Snail’s Pace

Offshore & Marine Stocks - UOB Kay Hian | 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 Stocks 1H21 Results Preview - Industry Conditions Improving, Albeit At A Snail’s Pace

  • Since our last sector update in mid Mar 21, global rig utilisation and day rates have largely improved, albeit slowly. The Brent forward oil price for Dec 25 has risen 22% year-to-date to US$59.67/bbl which could lead to increased offshore capex. We also note that as offshore wind gains importance, Singapore’s yards may yet play a more active role in building out the infrastructure.
  • For now, we maintain MARKET WEIGHT on the sector and have BUY ratings on Sembcorp Industries (SGX:U96), Yangzijiang Shipbuilding (SGX:BS6) and Keppel Corporation (SGX:BN4).



WHAT’S NEW


Green shoots growing slowly.

  • Since their troughs in Nov 20, the number of active offshore rigs as well as competitive utilisation have continued their recovery. While utilisation rates for jack-ups have stagnated this year, utilisation for semi-subs and drillships have risen 8-24% year-to-date while dayrates for jack-ups and mid-water semis have increased by 15% and 22% year-to-date respectively. While we caution that a few months’ worth of data points 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 could recover after experiencing capex delays related to COVID-19 in 2020. According to Sembcorp Marine (SGX:S51), a number of major offshore production projects will likely head towards Final Investment Decision in 2H21 and thus both Keppel Corporation (SGX:BN4) and Sembcorp Marine could benefit.

Oil price – US$100/bbl sooner than expected?



ACTION


Maintain MARKET WEIGHT on the sector.

  • Should activity in the oil & gas industry strengthen, leading 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 waves of COVID-19 infections globally are dealt with in a reasonably quick manner, and the global vaccine roll-out is effective.

With the exception of Sembcorp Marine, we believe that the industrial stocks in our universe present compelling investment cases:



ESSENTIALS


Promising outlook for potential oil demand recovery.

  • The roll-out of various vaccines over the past six months should allow for global oil demand to recover in 2021. Already, oil prices have trended upwards towards US$80/bbl, a level that was unimaginable at the start of 2021. Clearly this has been helped by OPEC+ which to date has retained its 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 1-3%. However, COVID-19 significantly affected energy demand, erasing nearly 9mmbpd of oil demand globally in 2020. 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 5.4mmbpd followed by another strong year in 2022 with a growing demand of 3.65mmpd.

Inactive rigs – Incrementally less of a hurdle.

  • If we look at the data from Jun 21 vs Oct 20, inactive rigs as a percentage of total rigs have continued to come down, especially for drillships which saw the largest decline in June vs March.
  • In 2021 year-to-date, 37 rigs have been taken out of the market (equivalent to ~4% of the global competitive rig fleet). Of the 37, 21 were converted to non-drilling applications, three were to be converted to other uses and only two were sold to other drilling companies. In addition, a total of 13 rigs were sold to the scrapyard. Anecdotally, rigs have also been deployed for other uses such as offshore renewable projects or even launching rockets into space.
  • See report attached below for complete analysis and data charts.


1H21 RESULTS PREVIEW


Keppel Corporation (SGX:BN4):

Sembcorp Industries (SGX:U96):


Sembcorp Marine (SGX:S51):


Yangzijiang Shipbuilding (SGX:BS6):






Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-07
SGX Stock Analyst Report BUY MAINTAIN BUY 6.370 SAME 6.370
BUY MAINTAIN BUY 2.590 SAME 2.590
HOLD MAINTAIN HOLD 0.124 SAME 0.124
BUY MAINTAIN BUY 1.90 UP 1.760



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