KEPPEL CORPORATION LIMITED (SGX:BN4)
YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
SEMBCORP MARINE LTD (SGX:S51)
Offshore & Marine - Daylight In Sight – Industry Metrics Appear To Have Troughed
- With competitive utilisation of offshore rigs approaching pre-pandemic levels and industry activity expected to pick up in 2022, we upgrade our sector weighting to OVERWEIGHT. We believe that current long-term oil prices that are around the US$60/bbl levels are supportive of higher industry capex, and nearer term we could see US$100/bbl.
- Our top picks are Yangzijiang, Keppel Corp and Sembcorp Marine.
Offshore utilisation and dayrates still a mixed bag.
- Competitive utilisation for offshore rigs have risen strongly year-to-date (see chart in report attached below) with the number of active rigs having risen to pre-COVID-19 levels. However, the better utilisation and dayrate numbers have been confined to jack-ups and mid-water semi subs (5,000-8,000’) while deepwater semis and drillships have seen weak dayrates in particular.
- We also note that particular regions like Brazil have seen utilisation rates exceed 90% in 2021.
Industry activity to pick up in 2022.
- Looking at future projects, the demand for production assets appears to have meaningful upside in the next few years which could have positive ramifications for both Keppel Corp (SGX:BN4) and Sembcorp Marine (SGX:S51).
- According to Rystad Energy, up to US$70b of offshore oil projects could be sanctioned by 2023 with another US$50b of offshore gas projects sanctioned by 2024 (see chart in report attached below).
US$100/bbl oil price not out of the question.
- In 2020, the major oil producing countries saw staffing levels decline by between 7% to 26% while capex estimates for the upstream industry have been slashed by a combined US$285b over the 2020-21 period. The lack of human resources, coupled with lower industry capex, could curtail oil supply in the face of demand recovery in 2022-25, making it likely to see an oil price of US$100/bbl in the medium term.
- In the past six months, the forward Brent oil price for 2025 delivery has risen from US$54/bbl to US$60/bbl and is thus more supportive of oil industry capex. However, we have not seen oil companies respond yet. With higher free cash flow generation in 2021, we expect industry capex to pick up going forward.
ACTION
- Upgrade sector view to OVERWEIGHT. Should activity in the oil and gas industry strengthen, leading to a revival in the offshore marine industry, we could see a cyclical upturn begin in the next 6-12 months. This assumes that the current wave of COVID-19 infections globally is dealt with in a reasonably quick manner and that governments are able treat the virus as an endemic.
- Our top picks in the sector have not changed:
- Yangzijiang Shipbuilding (SGX:BS6) should see margin expansion from 2H21 onwards and also potentially list its debt investments business; and
- Keppel Corp (SGX:BN4) due to its undemanding valuations and potential positive news flow regarding the merger of its O&M business unit.
- In addition, we believe that Sembcorp Marine (SGX:S51)’s risk-reward appears skewed to the upside post its recent successful S$1.5b rights issue.
ESSENTIALS
- Global upstream oil companies expected to generate record free cash flow (FCF) in 2021. With oil trading above US$70/bbl, publicly-traded oil companies have yet to meaningfully increase investment activity and are thus set to generate record-breaking free cash flows in 2021. According to industry estimates, this group’s combined FCF is expected to hit US$348b in 2021 and comfortably exceed the previous high of US$311b in 2008. In another indication of the low levels of investment, publicly-traded oil companies are forecast to grow revenue by 55% y-o-y in 2021 but capex is expected to only increase by 2% y-o-y.
- Slowly but surely, rigs are exiting the market. Comparing Sep 21 data vs Jan 21 data, we note that the total number of rigs globally has fallen to 730 rigs (or -5.1%) over the nine month period, with semi subs showing the largest fall in percentage terms (see chart in report attached below). According to our channel checks, out of the 34 rigs that have been taken out of the market, 12 were sold for scrap (5 x jack-ups, 5 x semi subs and 2 x drillships), thus implying that the other 22 rigs were repurposed for other industries or uses. In addition, the rigs that have remained in the market have seen higher activity, with the percentage of inactive rigs over the total available rigs decreasing since the start of 2021 (see chart in report attached below).
- Repurposing of rigs. As in any industry, capital and assets flow to the sectors where the returns are the greatest and this has been true for offshore rigs. In 2021, we have noted multiple instances of rigs being repurposed for activities outside of exploration and the production of oil and gas. These include:
- Undersea mining: The former drillship “Vittoria 10000” was renamed “Hidden Gems” and has started conversion into a subsea-mining vessel targeting nickel, manganese, copper and cobalt – all of these being key metals for EV batteries and renewable technologies. Pilot drilling will start in 2H22.
- CO2 sequestration: A jack-up rig was contracted to drill a well for the Porthos CO2 project which aims to capture and transport Rotterdam Port’s carbon emissions and store them in depleted North Sea oil and gas fields.
- Floating LNG: Maersk Drilling sold two of its harsh-environment rigs to US-based energy company New Fortress Energy, which will convert them into floating LNG facilities. Prior to the sale, both rigs were not actively drilling but were instead warm and cold-stacked respectively.
- Offshore wind installation: Boskalis purchased a 17-year-old drillship and is currently converting it into a wind installation vessel in Dubai. Upon completion in early 2022, it will work offshore Taiwan on a €150-300m project covering the installation of 62 jack-up foundations and 186 pin piles.
- Despite downgrades to earlier forecasts, oil demand is still expected to show a V-shaped recovery in 2021. In its Sep 21 update, the US Energy Information Administration (EIA) lowered its forecast on oil demand growth for 2021 and 2022 to account for the negative impact from the proliferation of the Delta variant. Notable events include India’s steep rise in COVID-19 infections during 2Q21 which slashed its oil demand by over 20%, lowering it from 4.8mmbpd to 3.9mmbpd. As a result, the US EIA now expects global oil demand to grow by 5.0mmbpd in 2021 versus its prior forecast of 5.3mmbpd made in Aug 21 and 5.5mmbpd in Mar 21.
RISKS TO OUR THESIS
- Prolonged global economic recovery should new COVID-19 variants arise
- Lack of financing for industries that are seen to be related to the fossil fuel industry
- Oil companies may remain wary of committing to offshore capex and instead channel free cash flow towards paying dividends
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-09-27
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