UOB Kay Hian analyst Adrian Loh has maintained his “overweight” recommendation on the offshore & marine (O&M) sector as the industry’s fundamentals continue to firm up.
In his report dated March 14, Loh sees several positives for the sector’s outlook, including the higher demand for rigs amid the ongoing supply destruction.
“In the past six months, the offshore drilling industry has been able to maintain its relatively high utilisation levels as it attempts to progress past pre-Covid-19 levels. Together with these stronger utilisation numbers, we note that dayrate numbers have also risen on a y-o-y basis with the exception of drillships,” he writes.
On the back of the elevated demand, the global offshore rig industry has lost 52 rigs, or 7% less y-o-y to 712 rigs as at March 10.
“Importantly, this supply destruction was seen across all asset classes with semi-subs registering the largest decline in supply in percentage terms, down 12% y-o-y to 102 rigs while in absolute terms, jack-up rigs saw 27 units exit the industry,” adds Loh. “In our view, this removal of excess supply is clearly a positive one, and should lead to upward pressure on utilisation and dayrates going forward”.
Furthermore, the analyst sees upside potential for drilling activity in FY2022-FY2023.
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Similar to his previous report on Jan 14, Loh notes that offshore investments in 2022 are set to increase 7% y-o-y, from US$145 billion ($198.04 billion) to US$155 billion, according to independent research company, Rystad Energy.
He adds that the US$150 billion of greenfield projects sanctioned in 2021 (from US$80 billion in 2020) is likely to be repeated in 2022.
To Loh, this will underline the positive outlook for the O&M sector in the short- to medium-term.
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“Underlining the strong cash generation by oil companies in 2022, the seven supermajors (BP, Chevron, Eni, Equinor, Exxon, Shell, TotalEnergie) are forecast to return around US$38 billion to US$41 billion to their shareholders via share buybacks, double the US$21 billion in 2014 when oil last cost more than US$100 per barrel,” he writes.
To this end, Loh says the sector could see a cyclical upturn start in the near term should activity in the oil & gas industry strengthen in 2022 and 2023.
The estimate assumes that the variants of Covid-19 are less lethal, that governments are able to deal with Covid-19 as an endemic situation, and that oil prices are not sustained at US$150 per barrel or more which could engender demand destruction, he adds.
Looking ahead, the demand for oil is expected to grow, although forecasts are subjected to the uncertainty from Russia’s invasion of Ukraine.
“Currently, its forecasts are based on global GDP growth of 4.3% in 2022 and 4.0% in 2023, which could be negatively affected should sanctions negatively affect the supply of commodities produced by Russia,” says Loh.
Naturally, the sanctions on Russia will present downside risks to the forecasts for global oil demand.
“Given the enormity of the economic sanctions levelled at Russia for its invasion of Ukraine, the Institute for International Finance last week predicted a 15% contraction in Russia’s GDP in 2022, double the decline from the global financial crisis,” notes the analyst.
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“An example of how sanctions can bite is Venezuela’s experience, with the country seeing a 60% contraction in oil demand from 2014 to 2019. Applying this to Russia’s 3.24 million barrels per day (mmbpd) of oil demand in 2020 would result in a contraction of nearly 1.3 mmbpd, thus eliminating over 40% of the EIA’s global oil demand forecast of 3.1 mmbpd for 2022,” he adds.
Loh’s top picks for the sector, Yangzijiang, Keppel Corporation and Sembcorp Marine (SembMarine) have remained unchanged from his previous report.
“Yangzijiang remains inexpensive at an FY2022 P/B of 0.6x and will see margin expansion over the course of the next six months,” he writes.
“Keppel Corp has undemanding valuations and potential positive newsflow regarding the merger or divestment of its O&M business unit; and Sembcorp Marine’s risk-reward appears skewed to the upside post its successful $1.5 billion rights issue in 2021. In addition, the company’s management stated that 2022 will be significantly better than 2021 and we believe there is a high chance that the company will win some meaningful orders this year,” he continues.
Loh has recommended “buy” on Yangzijiang, Keppel Corp and SembMarine with target prices of $1.95, $6.94 and 11 cents respectively.
As at 10.36am, shares in Yangzijiang, Keppel Corp and SembMarine are trading at $1.35, $6.12 and 8.7 cents respectively.
Photo: File photo
