● Most earnings in line
● Strong orders for certain firms
● Outlook in general still positive
Look-back at the 2Q season
With the end of the 2Q12 earnings season, we review results of firms under our coverage and track their YTD stock price performances. Companies reported earnings that were mostly in line with our expectations, with the exception of Keppel Corporation and Marco Polo Marine (above), and Rotary Engineering (below). Key events included the materialisation of major contracts for the rigbuilders with more order flows in the pipeline, as well as continued recovery in the OSV segment in terms of utilisation levels and charter rates. Ezion Holdings also clinched a series of contracts which supported its share price performance. Meanwhile, COSCO Corp (Singapore) is still contending with a steep learning curve in the offshore segment.
Good price performance by sector and picks
The FTSE Oil and Gas Index is the
2nd best performing sector YTD, trailing the FTSE Real Estate Index by just about 1%. Our stock picks have also fared well so far this year. Ezion Holdings (EZI) has been the best performer YTD in terms of price appreciation, followed by STX OSV (SOH), Sembcorp Marine (SMM) and Keppel Corporation (KEP). Key underperformers are KS Energy and Otto Marine.
Outlook remains positive
Investors were momentarily unnerved when WTI and Brent prices fell to a low of US$77/bbl and US$90/bbl respectively around end Jun, but those who noted that oil prices were still high enough for capex in the sector kept faith and were amply rewarded as oil prices recovered in Jul and Aug. Despite fears of a slowdown in the global economy, the rig market has picked up and the OSV market is on a gradual road of recovery, though the downstream segment is still in a difficult environment. Looking ahead, we expect continued good performance by SMM [BUY, FV: S$6.09], KEP [BUY, FV: S$13.34], EZI [BUY, FV: S$1.20] and SOH [BUY, FV: S$2.00], but among the rigbuilders we currently favour SMM. Maintain Overweight.
Hits and misses During the recent results season, companies under our coverage reported earnings that were mostly in line with our expectations, with the exception of Keppel Corporation and Marco Polo Marine (above), and Rotary Engineering (below). Higher revenue recognition in the O&M segment and lumpy contributions from the property division led to a strong set of results at Keppel, while Marco Polo was supported by its ship repair segment and the BBR associate.
Materialisation of contracts with more to come
The oil and gas sector is arguably one that is driven by newsflow to a large extent. More so than other sectors such as financials and telecommunications, contract wins (those secured YTD and outlook for new orders) are typically catalysts for stock prices. This results season was an important milestone for the rig builders, not due to a record set of earnings but because both companies finally announced the formal signing of the long-awaited Brazilian orders. To recap, Keppel Corporation (KEP) signed contracts with Sete Brasil for five semisubmersible rigs worth US$4.1b after securing an identical unit in Dec 2011. SMM, on the other hand, announced contracts worth US$4.0b for five drillships after clinching an identical unit in Feb 2012. We estimate that all these have increased KEP’s and SMM’s order books to about S$13.9b and S$11.7b, respectively. Meanwhile, Ezion Holdings also clinched a series of contracts with decent project IRRs.
Good price performance by sector and picks this year
The FTSE Oil and Gas Index is the second best performing sector YTD, trailing the FTSE Real Estate Index by just about 1% (Exhibit 2). The former has remained among the top three performing indices for the whole of this year, supported by solid industry fundamentals and positive news flow from the sector. Amongst the stocks, we find that our picks have also fared well so far this year (Exhibit 3). Ezion Holdings (EZI) has been the best performer YTD in terms of price appreciation, followed by STX OSV (SOH), Sembcorp Marine (SMM) and Keppel Corporation (KEP). Key underperformers are KS Energy and Otto Marine.
Preferred picks remain
Looking ahead, we expect the four top performing stocks (EZI, SOH, SMM, KEP) to continue. Prospects for both rigbuilders appear healthy as drilling conditions improve, but we favour SMM over KEP due to several company-specific factors (please refer to today’s separate SMM report). More assets are scheduled to be deployed at EZI, and the impact should be positively reflected in its results in the coming quarters. Earnings so far were always either in-line or above our expectations, and earnings disappointments have been rare. For STX OSV, we continue to like its strong order pipeline, niche market position and undemanding valuation (7-8x PER).
Outlook for broader sector remains positive
Investors were momentarily unnerved when WTI and Brent prices fell to a low of US$77/bbl and US$90/bbl respectively around end Jun, but those who noted that oil prices were still high enough for capex in the sector kept faith and were amply rewarded as oil prices recovered in Jul and Aug (Exhibit 4). Despite fears of a slowdown in the global economy, the rig market has picked up and the OSV market is on a gradual road of recovery, though the downstream segment is still in a difficult environment.
RIG MARKET
Slowdown? Not in the rig market
Despite fears of a global economic slowdown, the rig market has actually seen a pickup in activity over the past year. The high-spec jack-up markets continue to improve (Exhibit 5), and perhaps the most interesting feature is that demand and dayrates for older units have staged a remarkable recovery (Exhibit 6), according to IHS Petrodata. According to Pareto Securities, jack-up and mid-water units are currently being snapped up on long-term contracts by oil companies to meet their drilling schedules, causing a capacity crunch. In particular, the North Sea mid-water rig market is “booming” with no available capacity in either Norway or the UK before 20141.
Unrelenting demand for ultra-deepwater rigs
The ultra-deepwater market continues to lead with fixtures now in the US$500-600k/day range, up 40-50% from the low seen in 2009 (Exhibit 9). According to Upstream, dayrates for advanced ultra-deepwater rigs are set to hit the US$700k mark soon as oil companies jostle to secure scarce drilling capacity2. Ultra-deepwater specialist Seadrill (one of SMM’s key customers), is now reaping the benefits of its fleet expansion programme, having secured long-term charters worth US$4b for three units for work in the US Gulf at rates of around US$570k/day.
OFFSHORE SUPPORT VESSELS
OSV to rig ratio expected to start falling in 2013 According to IHS Petrodata and Clarksons’ estimates, the OSV to rig ratio is expected to start falling in 2013 after rising in the past few years. In particular, the ratio may fall below 3.9 by 2014 compared to 4.1 as at Mar 2012 (Exhibit 14). This change, though somewhat limited, reflects a tilt in market balance that is in favour of vessel owners.
OSV utilisation levels differ among regions (Exhibits 15-20)
In the Gulf of Mexico, the utilisation level for AHTS vessels has generally been volatile while that of PSVs has increased. Latin America, however, has seen fairly consistent utilisation levels and this trend is expected to continue with the development of Brazil’s large offshore basins that will support the demand for OSVs. In West Africa, though utilisation rates have declined from previous highs, the development of more deepwater projects in certain parts of the area may reverse the trend going forward. Finally, PSV utilisation levels in the Asia Pacific have seen a trend reversal recently.
Whose vessels work where
Among the companies under our coverage, Ezra Holdings has had (or currently still has) OSVs deployed in the Gulf of Mexico, Latin America, West Africa, the North Sea and Asia Pacific. Ezion Holdings, ASL Marine and Marco Polo Marine generally have their OSVs working in the Asia Pacific (includes Australia), though Ezion’s liftboats are deployed in various parts of the world. We hardly hear of companies sending their vessels to the Middle East (except in cases where their units are supporting some of their larger projects in the area), and this may be because the rates in the Middle East are among the lowest in the world. This is due to the shallow waters in the area and Saudi Aramco’s ability to control pricing.
DOWNSTREAM
No more green-field refineries in Singapore
The local downstream oil & gas sector is marked by a recent slowdown in large-scale refineries project works. Recent comments from the Economic Development Board – the lead government agency responsible for attracting energy investments – have also been telling. When asked for an update on a refinery plan, EDB’s deputy director of energy and chemicals said, “EDB does not have a specific aim of attracting a greenfield refinery at the moment … the focus is on upgrading the complexity of these [existing] refineries.”
Margin pressure and execution risks
With fewer jobs to contend with, downstream oil & gas companies are experiencing stiffer pricing competition. Consequently, margins have also fallen from 2010/2011 levels. In addition, several downstream contractors have also encountered execution issues in their overseas projects. Rotary was recently hit by a S$46m cost over-run for its SATORP project, and PEC still has unresolved claims on its Rotterdam joint-venture project.
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