Nomura: "Buy Selectively Offshore & Marine Stocks, Oil Price to Rebound"

Action: Ezion is our top pick for 2015; potential one bagger for investors We suggest selective buying of stocks in the Offshore & Marine (O&M) sector, as crude oil prices are expected to rebound from current unsustainably low levels of USD50/bbl or lower. Ezion (Buy, TP: SGD2.45) is our top pick for 2015F, and is a potential one bagger. In our view, it is a good bargain to pay 5x FY15F P/E for Ezion’s dominance in chartering of liftboats to service producing shallow water oil fields in Southeast Asia. Notwithstanding earnings upside potential from new contract wins, the 44% y-y rise in operational liftboats/service rigs to 23 units in 1Q15F (after two more deliveries in late-2014) will anchor our estimate of 34% 2-year core EPS CAGR in FY15-16F.

 

We expect active rig attritions in 2015F, as rig owners pull this supply-side lever to help re-balance demand/supply as day charter rates (DCR) fall, to ignite the belated rig replacement cycle for ageing deepwater rigs.

Transocean and Diamond Offshore have decided in 4Q14 to scrap 17 lower-specification floaters (equals to 5% of global fleet), and we expect other rig owners to follow this lead. The potential market for yards is huge, as we estimate that 36% of deepwater rigs and 52% of jackup rigs globally are at least 30 years old.
 

We expect newbuild drillship orders from 2H15F, as:

1) rig attrition exercise should return some stability to declining DCR (even as global demand falls in 2015F), which should subsequently catalyse the supply-push rig replacement cycle for deepwater rigs;

2) there are supply constraints to meet longer-term demand, due to the diminishing uncontracted rig deliveries (equals a high 47% of total deliveries in 2015F), and the fact that new orders are unlikely to result in a deepwater rig delivery till 2018F, and

3) oil prices are likely to rise h-h in 2H15F. But, we are negative on jackup rig orders outlook for 2015F. This is due to near-record newbuild jackup rig deliveries (only 7% is contracted) in 2015F, which implies the availability of units that can be offered at distressed prices to rig owners, who might otherwise place orders with the yards.

We suggest a pair trade of Buy SMM (TP: SGD4.07) and Reduce KEP (TP:SGD7.95), given the former’s higher exposure to drillship orders, and the latter’s traditional dominance of global jackup rig orders. 
 

YZJ chairman Ren YuanlinYangzijiang (YZJ) is a Buy on dry bulk carrier orders revival from 2Q15F
We are positive on the revival of dry bulk carrier orders from 2Q15F, which have 0.7 correlation with the Baltic Dry Index (BDI). We expect the BDI to benefit from seasonal dry bulk demand uplift from late-1Q15F. Buy YZJ (TP:SGD1.56), due to its high exposure to newbuild dry bulk carrier orders.  

Recent story: "Keep YZJ As An Outperform With Increased Target Price Of S$1.55"