This is Part 2. Part 1 was: OSK-DMG: Our High-Growth, Low-Valuation Oil & Gas Stock Picks...

Excerpts from analyst's report

OSK-DMG analyst: Lee Yue Jer, CFA & Jesalyn Wong

Prefer high-growth, low-valuation small-/mid-caps. In the offshore & marine space, for investors who are not restricted to purchase only large-caps with high liquidity, our Top Picks are
Giken Sakata, Ezion and Nam Cheong in order of preference.

Keppel Corp joins the list as our large-cap preferred pick, and Marco Polo Marine takes a special position as a potential event-driven alpha pick.

Giken Sakata – Low cost onshore old-well producer in Indonesia. Giken is focused on the old well programme with breakeven cost at c.USD20/bbl. Their sale price is currently fixed at IDR4160/litre, offering immunity to oil price fluctuations till after Jun 15 when the prices are reset. Production is expected to surge with all five fields being online this year from the current production in its first two fields, and we expect this production surge to more than offset any oil-price changes.

With costs on par with OPEC producers, Giken’s management is unfazed by the oil market conditions and continues to drill, alongside securing more acreage and entering into new old-wells contracts. Already the largest old-well operator in Indonesia by far, we expect Giken to continue growing its portfolio and maintaining its dominant position. 

Ezion – Still a “Blue ocean” strategy after five years: Ezion embarked on a “blue ocean” strategy as the only liftboat operator in the Asia Pacific. Ezion has grown from a fleet size of four in 2011 to 34 units in 2015, enjoying earnings and cash flow visibility with contract durations between 3-7 years stretching up to 2022. Ezion has intelligently co-opted potential competitors into its operations, such that today after five years there is still no second player in this industry regionally. We see potential for earnings to double within three years even from the current record highs as the Asia Pacific market remains underserved by this operationally-superior asset.

namcheong_build9.14"We believe Nam Cheong's build-to-stock model has effectively disrupted the industry, giving customers the new flexibility to bid for contracts without initial asset ownership," says OSK-DMG.
Photo: Company
Nam Cheong – The dominant shallow-water support vessel builder. Nam Cheong is now the largest shallow-water Offshore Support Vessel (OSV) builder in the world with a c.15% market share.

We believe its build-to-stock model has effectively disrupted the industry, giving customers new flexibility to bid for contracts without initial asset ownership, which would be especially appreciated in the current uncertain climate.

Nam Cheong’s building programme includes a good mix of production-focused assets such as accommodation work boats and work barges, which will continue to enjoy strong demand today. We believe Nam Cheong will emerge from this downturn with a stronger market position and closer customer ties. 

Keppel Corp – Near Market, Near Customer. Keppel employs the Near Market, Near Customer long-term strategy, and executes this vision through entering developing markets very early. Its early entry into Brazil has paid off, with its established yard enjoying relatively smooth operations.

It also has yards in the Philippines, Azerbaijan, China, and we expect the Mexican yard agreement to be inked this year. In addition, Keppel has a strong design capability, with new products such as the Floating Liquefied Natural Gas (FLNG) vessel design, its harsh environment rig designs, and its proprietary CAN DO drillship design. These yield strong competitive advantages over the medium to long term.

Marco Polo Marine – Jack-up rig contract could spark a sharp rerating. Marco Polo Marine (MPM) first entered the OSV business in Indonesia in 2010, with little prior experience and no track record. Today, it owns the largest fleet of 8,000-brake horsepower (bhp) anchor handlers in Indonesia and OSVs are the largest contributor to the company’s bottomline. 

We see the jack-up rig, to be delivered in 4QCY15, as a potential game-changer to the company in the same way. Indonesia’s net-importer status, burgeoning oil consumption, and strong political will to drive oil & gas investments present a positive macro outlook for MPM. Management has unflinchingly executed their strategy to achieve the vision of being a market leader in the OSV space in Indonesia – we now look forward to their next epoch. 

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