Offshore and marine sector in dire straits

The offshore and marine sector appears to be sailing into a perfect storm of sinking oil prices, rig oversupply and cuts in capital spending by oil companies, prompting Maybank Kim Eng to downgrade the sector to underweight from neutral.

Oil and gas stocks could slide a further 25 per cent if oil prices stay below US$80 (S$103) per barrel – the threshold price for deepwater project profitability – for a sustained period, according to its report.

Brent, the global benchmark, rose US$1.23 to US$79.33 a barrel on ICE Futures Europe on Thursday.

“Shaky oil prices as oil companies head into their year-end budgeting season could cloud decision-making. This could lead to more cautious budgets,” Mr Yeak Chee Keong, a Maybank Kim Eng analyst, said.

“We also expect a broad slowdown in orders for asset builders, which are more capital-expenditure sensitive. Although asset owners with operating expenditure exposure are less likely to disappoint on earnings, they may not be spared either from a sector de-rating.”

When concerns over deepwater supply and global oil firms’ capital spending cuts surfaced earlier this year, offshore drillers felt sustained high oil prices could return the market to equilibrium in 12 to 18 months. Lower oil prices have now foiled hopes of a 2015 recovery, the report said.

“And if oil prices stay below US$80 a barrel for a sustained period, we see risks of order cancellations. Recent fixtures indicate that deepwater rigs are being renewed at 25 per cent to 40 per cent lower day rates on a perceived supply glut. The jackup rig market looks increasingly vulnerable. About 86 per cent of the new supply here has yet to be contracted. As a result, we expect drillers to defer their new-rig orders in 2015,” the report said.

Even if oil rebounds above US$100 a barrel, a short-term rig oversupply may still cap an immediate return in new orders as this was already a problem before the oil-price collapse, Mr Yeak said.

“We estimate that the market has factored in $9 billion to $11 billion of new orders for Singapore rigbuilders for fiscal 2015. We believe these are now unattainable as a supply glut in a lower oil price environment could curtail new orders,” he said.

Although orders for production assets such as offshore floating production, storage and offloading modules are expected to be strong, they may not be enough to make up for weaker rig orders.

“Reflecting this, we cut fiscal 2015 and 2016 order intake for Sembcorp Marine by about 20 per cent,” the brokerage said, downgrading the rigbuilder to “sell” from “hold”.

Meanwhile, DBS Group Research downgraded offshore support vessel provider PACC Offshore Services to “hold” from “buy”, citing lacklustre third-quarter results as margins declined in key operating segments.

But despite the overall sector downgrade, Maybank Kim Eng sees “average upside of 34 per cent” for Ezion Holdings and Nam Cheong, its top picks.

OCBC Investment Research also maintained a “buy” call on Ezion and Nam Cheong. OCBC noted that Ezion has entered into a subscription agreement in which Triyards Holdings will issue 29.5 million non-listed warrants to Ezion for $1. Each warrant shall carry the right to subscribe for one share of Triyards at an exercise price of 56.3 US cents a share.

Offshore marine group Nam Cheong’s third-quarter earnings beat estimates, with revenue rising 81 per cent year on year to RM618.6 million (S$238.8 million) and net profit more than doubling to RM126.3 million. The firm has seen a record year so far in terms of new orders, OCBC said.
Source: The Straits Times



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