Singapore Offshore & Marine Stocks - UOB Kay Hian 2022-03-14: Industry Fundamentals Continue To Firm Up

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51) KEPPEL CORPORATION LIMITED (SGX:BN4)

Singapore Offshore & Marine Stocks - Industry Fundamentals Continue To Firm Up

Rig dayrates and utilisation rates remain relatively strong. With rig demand remaining robust and supply continuing to erode as older rigs are removed, it appears that the trend towards better industry fundamentals continues apace.
Given the lack of investment in the upstream oil industry since 2014, we expect capex, especially for production assets, to increase.
Our sector rating remains OVERWEIGHT, and our top picks are Yangzijiang Shipbuilding (SGX:BS6), Keppel Corp (SGX:BN4) and Sembcorp Marine (SGX:S51).

In the past 6 months, the offshore drilling industry has been able to maintain its relatively high utilisation levels as it attempts to progress past pre-COVID-19 levels. Together with these stronger utilisation numbers, we note that dayrate numbers have also risen on a y-o-y basis with the exception of drillships.

On a y-o-y basis, the global offshore rig industry lost 52 rigs (or -7%) to 712 rigs as at 10 Mar 22. Importantly, this supply destruction was seen across all asset classes with semi-subs registering the largest decline in supply in percentage terms, down 12% y-o-y to 102 rigs while in absolute terms, jack-up rigs saw 27 units exit the industry. In our view, this removal of excess supply is clearly a positive one, and should lead to upward pressure on utilisation and dayrates going forwards.

According to Rystad Energy, offshore investments in 2022 are set to increase 7% y-o-y, from US$145b to US$155b. In addition we highlight that the US$150b of greenfield projects sanctioned in 2021 (2020: US$80b) will likely be repeated in 2022, thus underlining the positive outlook for the offshore marine sector in the short to medium term.
Underlining the strong cash generation by oil companies in 2022, the seven supermajors (BP, Chevron, Eni, Equinor, Exxon, Shell, TotalEnergie) are forecast to return around US$38-41b to their shareholders via share buybacks, double the US$21b in 2014 when oil last cost more than US$100/bbl.

In its latest Mar 22 update, the US Energy Information Administration (EIA) increased its forecast for oil demand growth in 2022 and 2023 by 0.27mmbpd and 0.23mmbpd respectively (versus its Jan 22 forecast). However, it did acknowledge that its forecast is subject to “heightened levels of uncertainty” resulting from a variety of factors, including Russia’s invasion of Ukraine.
Currently, its forecasts are based on global GDP growth of 4.3% in 2022 and 4.0% in 2023, which could be negatively affected should sanctions negatively affect the supply of commodities produced by Russia.

Given the enormity of the economic sanctions levelled at Russia for its invasion of Ukraine, the Institute for International Finance last week predicted a 15% contraction in Russia’s GDP in 2022, double the decline from the global financial crisis.
An example of how sanctions can bite is Venezuela’s experience, with the country seeing a 60% contraction in oil demand from 2014- 19. Applying this to Russia’s 3.24mmbpd of oil demand in 2020 would result in a contraction of nearly 1.3mmbpd, thus eliminating over 40% of the EIA’s global oil demand forecast of 3.1mmbpd for 2022.

Should activity in the oil & gas industry strengthen in 2022 and 2023, thus leading to a revival in the offshore marine industry, we could see a cyclical upturn start in the near term. This assumes that variants of COVID-19 are less lethal, that governments are able to deal with COVID-19 as an endemic situation, and that oil prices are not sustained at US$150/bbl or more which could engender demand destruction.
Key stock calls:
- Yangzijiang Shipbuilding (SGX:BS6) remains inexpensive at 2022E P/B of 0.6x and will see margin expansion over the course of the next 6+ months;
- Keppel Corp (SGX:BN4) has undemanding valuations and potential positive newsflow regarding the merger or divestment of its O&M business unit; and
- Sembcorp Marine (SGX:S51)’s risk-reward appears skewed to the upside post its successful S$1.5b rights issue in 2021. In addition, the company’s management stated that 2022 will be significantly better than 2021 and we believe there is a high chance that the company will win some meaningful orders this year.

Higher-for-longer oil prices that factor in a “war premium”, thus leading to demand destruction.
Delays in 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.
Despite the high oil price resulting in super-normal free cash flow, oil companies may remain wary of committing to offshore capex and instead focus on share buybacks or paying dividends.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-14

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