UOB Kay Hian analyst Adrian Loh has maintained “market weight” on the offshore marine sector, amid “very small green shoots emerging”.
In a report dated March 17, Loh says “the latest rig utilisation and day rates could indicate that the worst is over for the offshore marine industry”.
Competitive utilisation rates for offshore rigs have risen “strongly” in the past few months, notes Loh.
“Specifically, utilisation rates for deep-water semis and jack-ups have risen 3% and 8% respectively, while on a y-t-d basis, day rates for mid- and deep-water semi-submersibles have risen by 13% and 6% respectively.”
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“While we caution that a few months’ worth of datapoints may not point to anything meaningful at present, the short-term trend is nevertheless positive,” he says.
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The sector’s industry activity is also looking to pick up. While demand for new drilling rigs are likely to continue to be weak, demand for production assets appears to be strong for the next few years.
This, according to Loh, could be positive for Keppel Corporation (Keppel Corp) and Sembcorp Marine (SembMarine).
“According to Rystad Energy, 592 oil & gas project commitments will take place over the 2021-25 period – this is a 66% increase compared with 355 projects in the 2016-20 period, and higher than the 478 seen in the 2011-15 period,” he says.
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In addition, oil prices could potentially hit the US$100 ($134.24) per barrel mark in the next two years.
“In 2020, the major oil-producing countries globally saw staffing levels decline by 7-26%; even Saudi Arabia was not spared as it saw a 6% decline in staffing levels.”
“Post the precipitous 49% decline in oil industry capex over 2014-20, spending is forecast to resume over the next few years, albeit at a relatively slow rate of 4% compound annual growth rate (CAGR) over 2020 to 2025,” he says.
The lower availability of human resources coupled with lower capex spending could curtail oil supply amid recovery in demand.
As such, Loh views that prices hitting US$100 per barrel is “not out of the question” in the next two to three years.
“The Brent oil forward curve has risen from US$45/bbl to US$55/bbl for 2025 delivery in the past three months, and is thus more supportive of oil industry capex,” he says.
Looking ahead, Loh says the industry could see a “cyclical upturn start” in the next six to 12 months should activity in the oil and gas industry strengthen and lead to a revival in the offshore marine industry.
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This is based on the assumption that the current wave of Covid-19 infections are dealt with reasonably quickly and that the vaccine is effective.
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“Our top picks in the sector have not changed: a) Yangzijiang Shipbuilding (YZJ), given our belief that it will benefit from continued new order flow in 2021; and b) KEP due to its undemanding valuations and potential positive newsflow regarding the merger or divestment of its O&M business unit,” he says.
As at 4.26pm, shares in Keppel Corp are trading 1 cent lower or 0.2% down at $5.12, while shares in Yangzijiang are trading 1 cent lower or 0.8% down at $1.24
