Excerpt from OCBC Investment Research report
Analyst: Low Pei Han (left)
During its recent 3Q14 results briefing, Kim Heng Offshore & Marine mentioned that 2H14 would be a stronger period due to delays in arrivals of drilling rigs and offshore support vessels from customers in 2Q14, but given the industry slowdown, work flow may not be as forthcoming as expected earlier.
Oil prices have taken another tumble since then, and Brent is now trading at a five-year low of about $68/bbl.
With oil price forecasts being cut across the board, we think that order flows are likely to slow even further.
More enquiries for warm-stacking of rigs
In our earlier report, we highlighted that management believes that more rigs may be coming to Singapore to be warm or cold stacked.
A Reuters report published on 1 December quoted Kim Heng's management saying that it has received enquiries to stack dozens of rigs over the past few weeks.
Rigs in warm stack maintain basic operations and crew as owners monitor the market for signs of recovery.
If more rigs start getting cold-stacked, that would mean owners expect the downturn to be prolonged.
Looking ahead, oil prices are likely to remain subdued for at least the first half of next year.
Meanwhile, risks are tilted more to the downside as any further oil price volatility would affect the rate at which projects are being awarded, compounded by the renewed focus by international oil companies on shorter term shareholders’ returns.
The ongoing requirement for rig maintenance and repair means that Kim Heng’s business is less cyclical than the newbuild business, which may be more affected during a downturn.
However, with the de-rating of the broader sector, we lower our P/E from 10x to 7x, lowering our fair value estimate to S$0.16.
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