KEPPEL CORPORATION LIMITED (SGX:BN4)
SEMBCORP MARINE LTD (SGX:S51)
YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
Singapore Offshore & Marine Stocks - Continued Healthy Demand For Production Assets, Helped By Strong Oil Prices
- The rig market, particularly the semi-submersibles segment, has continued to gain strength in 2022 with higher utilisation and day rates. On the production side, it is notable that both of Singapore’s shipyards have won large orders in 2H22 and we expect more of such in 2023, underpinned by oil prices that will be well supported above US$100/bbl in the near to medium term.
- Our sector rating remains OVERWEIGHT, and our top picks are Keppel Corp and Sembcorp Marine.
The offshore market has gotten tighter
- The offshore market has gotten tighter, with utilisation rates back above pre-pandemic levels, while day rates for semi-submersibles in particular have been extremely strong. Year-to-date, only 10 rigs have been taken out of the global market either via recycling or conversion. However, we note that the M&A market is a lot more active with 45 rigs changing hands vs only 20 in 2021, and the highest since 2017. Compared to 2019, the global offshore rig industry has lost 57 competitive rigs (-9%) to 598 rigs as at early-Nov 22. In our view, this is positive as the extraction of excess supply should allow utilisation and day rates to continue to further firm up going forwards.
- More rigs being re-activated. In the face of higher utilisation levels, more and more rigs across the three asset classes have been reactivated as we note that the percentage of warm-and cold-stacked rigs have declined by 10-33% y-o-y. In addition, we highlight that there are 437 rigs currently drilling globally vs 400 in 4Q20.
- Large numbers of jack-up rigs limiting upside. Higher drilling demand has seen more jack-ups being put to work. However, it appears that the weight of supply has limited upside on day rates as well as utilisation rates. The average utilisation rate for 300-feet independent cantilevered jack-ups has risen to nearly 68%; however, day rates remain in the doldrums, averaging US$83,500/day year-to-date vs 2017’s average of US$129,000.
- Deepwater drilling seeing much better supply/demand dynamics. Deepwater drilling assets have seen better recovery in utilisation rates and day rates. For the sixth-generation drillships in particular, rig-owners such as Transocean and Valaris have stated their belief that day rates will exceed US$400,000/day in 2023 vs average drillship dayrates of over US$330,000/day at present.
- Bullish FPSO outlook. In its latest 3Q22 floating production systems report, Energy Maritime Associates (EMA) stated that 192 production projects are in the ‘visible planning cycle’, an increase of nine from 1Q22, which implies a bullish outlook for new orders. Importantly, EMA notes that 65 are in the bidding or final design stage as available LNG and alternatives to Russian gas are creating demand for quick import terminals. In our view, Sembcorp Marine and Keppel Corp should be well placed to win some of these orders in 2023.
Oil demand expected to grow, but forecasts face heightened uncertainty.
- In its latest Nov 22 update, the US Energy Information Administration (EIA) forecasts oil demand growth of 2.5mmbpd and 1.5mmbpd for 2022 and 2023 respectively. Note that since Jan 22, the US EIA has gradually downgraded 2023 oil demand growth from its original forecast of 1.8mmbpd growth. It has highlighted that its forecast is subject to “heightened levels of uncertainty” resulting from a variety of factors, including Russian oil sanctions as well as less robust global economic activity.
- Note that an additional Russian oil embargo goes into effect on 5 Dec 22, banning the provision of shipping, insurance and other services related to Russian oil, and if China continues to open up, this would result in tighter oil and natural gas markets in the near term.
- We believe Brent oil prices will be well supported above US$100-110 over the next 3- 6 months. The physical market for energy continues to be tight, signalling that demand continues to outpace supply. In our view, supply dynamics will likely outweigh any demand destruction and continue to push oil prices higher over the coming quarters. After the US mid-term elections with power evenly split between Republicans and Democrats, continued US Strategic Petroleum Reserve drawdowns may be more difficult.
- Given the structural undersupply of energy and the lack of capex and supply response by producers, the long-term case for energy remains bullish, in our view.
Keppel Corp 3Q22 business update recap
- Keppel Corp (SGX:BN4) reported a strong 3Q22 business update with revenue rising 24% y-o-y to S$6.8b and above our expectations. While the company did not disclose net profit numbers for 3Q22, it did state that net profit was lower y-o-y due to the high-base effect of lumpy en bloc sales which boosted 3Q21 profits. The two key segments that performed well was energy & environment and asset management while, as expected, management sounded bearish on its China property business.
- We have a BUY rating on Keppel Corp with a SOTP-based target price of S$10.11. Keppel Corp appears to be at an interesting cross-roads in 2022 with:
- the exit of its KOM segment, and
- its move towards a more asset-light and recurring earnings business model, and towards its 15% ROE target vs 9.1% in 2021 and 1H22 annualised ROE of 8.4%.
- Of interest will be the pace of its asset monetisation which could bolster earnings again in 2022 and thus lead to another dividend surprise.
- See
Sembcorp Marine 3Q22 business update recap
- Sembcorp Marine (SGX:S51)’s 3Q22 business update contained weaker-than-expected guidance for 2H22. Although we have raised our loss estimates for 2022 due to high labour costs, we believe the latter will not be an issue after end-22.
- Nevertheless, we maintain our bullish view on Sembcorp Marine as the offshore marine industry remains strong, backed by high commodity prices, with the added benefit of the completion of the merger with KOM in 1Q23. We also highlight the potential for Sembcorp Marine to be added to the Straits Times Index after its merger is completed.
- Maintain BUY with a target price of S$0.156. With the Sembcorp Marine/KOM merger terms largely in place and the uncertainty out of the way, the focus on Sembcorp Marine will be to garner new orders in 2022 and add to its orderbook. Our target book-value multiple for Sembcorp Marine of 1.2x reflects our confidence that it will garner such order thus leading to positive share price performance.
- See report: Sembcorp Marine - UOB Kay Hian 2022-11-16: Weaker-than-expected Guidance For 2h22; Medium-term Outlook Remains Bright.
- See also:
Yangzijiang Shipbuilding 3Q22 business update recap
- We downgraded Yangzijiang Shipbuilding (SGX:BS6) to a HOLD after its 3Q22 business update. While its 3Q22 update showed solid project execution with the continued timely delivery of its customers’ ultra-large containerships, its recent share price performance has been strong. In addition, with its yard capacity full until at least 2H25, and new order wins unlikely to be announced until later in 1Q23, we see few catalysts for Yangzijiang's Share Price at present.
- Maintain HOLD with a fair value of S$1.55. Our target P/E multiple of 9.0x is unchanged and is 1 standard deviation above the Yangzijiang Shipbuilding’s past 5-year average of 6.7x which we view as fair given the company’s earnings growth in 2023, as well as the stability of its earnings due to its US$10.3b orderbook at present. We note that at our fair value of S$1.55, Yangzijiang Shipbuilding would trade at a 2023F P/B of 1.3x.
- See report: Yangzijiang Shipbuilding - UOB Kay Hian 2022-11-15: Valuations Starting To Look Stretched; Downgrade To HOLD.
- See
Maintain OVERWEIGHT on the sector.
- We continue to like Keppel Corp and Sembcorp Marine which have combined orders of just over S$15b year-to-date. In our view, this bodes well for the merger which is expected to be completed by 1Q23, especially given that the transaction has now been much simpler.
- Risk to our thesis:
- Delays in project sanctioning due to supply chain inflationary pressures.
- Lack of financing for industries that are seen to be related to the fossil fuel industry.
- Despite the high oil prices 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
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https://research.uobkayhian.com/
2022-11-23
SGX Stock
Analyst Report
10.110
SAME
10.110
0.156
SAME
0.156
1.550
SAME
1.550
