SINGAPORE (Jan 21): The offshore and marine (O&M) sector is kept at “market weight” by UOB Kay Hian, as analysis by the research house on the global oil and gas (O&G) sector and the global rig market indicated that while there have been some positive developments, a new rig-building upcycle is some years away due to the excess supply of such assets.
In a Monday report, analyst Adrian Loh says, “Given recent order wins, we see the offshore wind sector presenting opportunities while the electric vehicle (EV) sector does not yet present a threat to oil demand.”
The O&G industry is expected to resume spending at a rate of about 6% per annum over 2020 to 2025, after capes was slashed by 43% over 2014 to 2016. Although this rate of increase is still less than the 12% per annum in 2010 to 2014, Singapore yards are still expected to benefit, as they are exposed to both the exploration and production segments of the upstream oil and gas industry.
Meanwhile, oil prices have been supportive as brent oil is trading between US$55-60 per barrel (bbl) in recent months. And its three to five year forward oil price are at levels where offshore oil projects can generate decent project internal rate of returns (IRR) and are thus supportive of the offshore marine industry.
“We highlight that oil discoveries globally have slowed down and human resources have been curtailed in recent years. Coupled with the 2014-16 capex crunch, these factors could potentially lead to a supply slowdown in the medium term, thus squeezing oil prices upwards,” says Loh.
In 2019, Loh noticed that industry activity did not slow down, as there was a higher level of licensing activity comparted to the previous years, driven by stability in oil prices. Hence, he expects licensing activity, as well as future drilling activity, to remain elevated globally with more than 50 licensing rounds forecasted.
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On the back of the growth in the offshore wind sector and order wins by Keppel and Sembcorp Marine in 2019 coming up to nearly $1 billion, the analyst continues to see this sector as an opportunity for both companies with a total addressable market of approximately US$300 billion.
Keppel remains to be UOBKH’s top sector “buy” pick, with a target price of $7.61. The stock is currently trading at -1SD below its historical price-to-book ratio of 1.5 times. The research house has also upgraded Sembcorp Marine to “hold” with a higher fair value of $1.40.
As at 11.40am, shares in Keppel and Sembcorp Marine are trading at $6.81 and $1.27, respectively.
