OIL PLAYERS: Top sells, top buys, potential winners

Excerpts from analyst report
namcheong build9.14 Nam Cheong builds offshore support vessels (OSVs) and can easily defer its delivery schedule in its outsourced shipyards. Photo: Company

yeakcheekeong7.14 Maybank Kim Eng analyst: Yeak Chee Keong, CFA (left)

Our view on oil
We believe that Brent price will revert to the full cycle’s marginal cost required to produce new oil. Based on breakeven cost, we believe that this should be at the USD70-75/bbl level. But the pace of the recovery will be gradual due to influence of shale and slow supply responses.

Our view on Singapore oil services sector
· Oil services players will stage a comeback due to the importance of offshore oil, but expect cost recalibration and consolidation to inflict short-term pain to all service providers.

· At current stage, players with opex and production exposure may still benefit from oil companies enhancing existing fields for quick paybacks.

· Maintenance providers and OSV owners with production-focused fleet are relatively more resilient and also more likely to lead an uneven cyclical rebound.

On further assessment of industry subsectors, our key investment cases are:
1. Avoid capex-sensitive rigbuilders - Rig supply-demand imbalance implies weak rig order intake for rigbuilders.
2. OSV owners to be hit hard in 2015 but may see recovery as early as 2016.
3. Production and maintenance players are more defensive and also likely to be among the first to recover.

Valuations. We believe that earnings-based valuations are unreliable and have switched to primarily P/BV valuations.

We used bond yields to gauge equity risks premiums as we believe that leverage becomes highly important in a downcycle. We also cross-reference valuations with EV/Replacement value for selected asset owners.

Top BUYs: Ezion (TP SGD1.55) and Pacific Radiance (TP SGD0.80).
Top SELLs: Sembcorp Marine (TP SGD2.45), Cosco (TP SGD0.43), Vard (TP SGD0.35).

Potential winners
We believe Ezion, Pacific Radiance, PACC Offshore and Nam Cheong have the qualities to emerge stronger from the downturn.

» Ezion’s liftboat business has been gaining early traction in Southeast Asia over the last two years. The industry’s focus on improving well and production efficiency is likely to spur the adoption of this asset class, paving the way for higher penetration and demand. We are convinced Ezion can be a prime beneficiary. Its relative resilience in this downcycle, in terms of rates stability and utilisation lends further confidence.

» We expect charter rate pressure and weak utilisation to force small, highly-leveraged and inefficient players in the OSV segment to consolidate. Pacific Radiance and PACC Offshore, being larger players with bigger fleets, diverse exposure and strong financial backing should gain market share as weaker players fail. Of the two, we prefer Pacific Radiance due to its shallow-water exposure and uncertainties for PACC Offshore’s Mexico JV and its ability to contract its second SSAV.

» Nam Cheong’s build-to-stock model is a double-edge sword. If it survives the downturn (which we believe it will) and demand for newbuild OSVs returns, it should be able to benefit ahead of build-to-order players. The flexibility of its outsourced business model has been demonstrated in this downturn, seen from its ability to easily defer its delivery schedule in its outsourced yards while other shipyards struggle with yard under-utilisation. But as an asset builder, we believe that its recovery may lag the asset owners.

Players most at risk of failure in an extended downturn, in our opinion, are Cosco, Vard and Swiber. Our concerns main arise from their high leverage and less defensive exposure. The first two may have some form of backing from financially strong parents.

Full report here.

OIL PLAYERS: Top sells, top buys, potential winners

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