Robust dynamics continue offshore. Broker retains optimistic view as small/mid caps outperform

THE CONTEXT • The offshore and marine industry is performing well, with high oil prices inspiring significant investment in exploration and production. This in turn creates strong demand for support vessels and rigs.  • Many a player in the vessels and rigs space perished during the oil crisis pre-Covid and during the pandemic. That's why survivors are enjoying a business boom as charter rates for their assets climb. Source. • Survivors (many via debt restructuring) include a variety of companies -- Nam Cheong (support vessels), Beng Kuang Marine (maintenance of FPSOs), Dyna-Mac (production of top modules for FPSOs), Marco Polo Marine (support vessels), etc. FPSO (floating production storage and offloading) vessels -- they process oil from nearby oilfields out at sea, and store it until it can be transferred to a tanker.     • In today's report, UOB Kay Hian gives an update on the bigger names such as Keppel, SembCorp Industries and Yangzijiang Shipbuilding. Read excerpts below...

Excerpts from UOB KH report
Analyst: Adrian Loh

Offshore Marine – Singapore Industry

WHAT’S NEW
• Still a bullish outlook. Over the past three years, the number of active offshore rigs have declined 9-25% as old assets have exited via scrapping, cold-stacked or undergone conversion.

The lower supply, together with higher oil & gas prices and robust demand, has led to higher utilisation and day rates across almost all asset classes - from offshore support vessels to the largest drillships.

Only jack-up day rates have retreated, down 7% from its 2024 peak due to contract cancellation by Saudi Aramco.

Overall, most of Singapore's small/mid-cap offshore marine (O&M) names have seen a lift in their share prices ytd vs Seatrium which, while having won a number of key contracts, faces various investigations by local authorities.

• Not all about oil. Industry reports indicate that a number of final investment decisions for Southeast Asia's offshore gas projects could see a total of US$100b in capex spending by 2028, particularly in Indonesia and Malaysia where a number of discoveries have been made.

According to Rystad Energy, national oil companies will account for 31% of this capex while oil majors will undertake a 25% share.

Key projects to note include Abadi LNG, Eni's Indonesia Deepwater Development and BP's Tangguh Ubadari Carbon Capture.

These, and other projects, could have positive ramifications on Singapore's O&M sector, in our view.

• Impact of a potential Trump presidency. Former President Trump's stated goal is to boost exploration activity in the US which could be negative for upstream companies over the longer term due to the potential for higher oil supply. However, this could be positive for oil services and offshore marine companies given higher demand for such services and assets, and thus buoy utilisation and day rates.

• Positive read-through from US earnings season. With two of the three major US oilfield services companies (Halliburton and SLB) having reported their 2Q24 results, it was clear that their respective international markets were key growth drivers while North America saw revenue decline and margin compression.

In its 2Q24 briefing, SLB - which beat market expectation - stated that it expects to see "ongoing momentum in the international markets" while Halliburton commented that its international business is "experiencing solid demand and high activity levels".

Maintain sector view at OVERWEIGHT Adrian Loh, analystOur conviction levels for STM has moderated due to a lack of transparency from Singaporean authorities regarding continued investigations for its exposure to 2014's Operation Car Wash. In the small/mid-cap space, we like Marco Polo Marine for its earnings growth in 2024 due to higher charter and utilisation rates for its assets.

Full report here