UOB Kay Hian’s Adrian Loh has maintained his “overweight” recommendation for the offshore sector, giving “buy” ratings to his top three picks, namely, Keppel Corp, Sembcorp Marine and Yangzijiang.
Target prices for the three companies stand at $10.11, 15.6 cents and $1.16 for Keppel, Sembmarine and Yangzijiang respectively.
In his report, Loh says that the rig market, particularly the semi-submersibles segment, has strengthened in 2022 with higher utilisation and day rates.
Loh points out that the supply-demand dynamics continue to shift positively in favour of rig owners as supply destruction has continued.
On a y-o-y basis, the global offshore rig industry had lost 36 rigs, down 7% y-o-y to 694 rigs as at Aug 12.
“In our view, this is positive as the extraction of excess supply should allow utilisation and day rates to continue to firm up further going forward,” Loh says.
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He also expects industry activity to pick up in 2022 and 2023, highlighting that the demand for production assets appears to have “meaningful upside” in the next few years. This could have positive ramifications for both Keppel Corp and Sembcorp Marine, Loh thinks.
He cities statistics from Rystad Energy, which notes that offshore investments in 2022 are set to increase 7% y-o-y from US$145 billion ($202.57 billion) to US$155 billion.
Loh also thinks that the US$150 billion of greenfield projects sanctioned in 2021 will likely be repeated in 2022, thus underlining the positive outlook for the offshore marine sector in the near to medium term.
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The offshore sector will also be supported by the oil price outlook, with Loh saying that Brent oil prices should remain high in the near to medium term, and be well supported above the US$100-US$110 range as winter hits the northern hemisphere.
In late August, Saudi Arabia warned that there was a significant disconnect between financial and physical markets and that this “extreme” volatility could prompt the OPEC+ alliance to act to throttle back production.
This is coupled with OPEC spare capacity close to historic lows and a large scale gas-to-oil switching taking place in Europe due to a lack of Russian gas.
However, in its latest Aug 22 update, the US Energy Information Administration (EIA) forecasts oil demand growth of 2.1 million barrels per day (bpd) for both 2022 and 2023.
Loh says in the past few months, the US EIA has gradually downgraded 2022 oil demand growth from its March forecast of 3.1million bpd growth.
He also points out that an additional Russian oil embargo goes into effect on Dec 5, banning the provision of shipping, insurance and other services related to Russian oil. If the US successfully bans dollar clearing for Russian oil purchases, this would result in tighter oil and natural gas markets in the near term.
Locally, Loh continues to like Yangzijiang, which is “inexpensive” at an FY2022 P/B of 0.7x. He also expects the company to see margin expansion in the next few quarters.
He is also positive on Keppel and Sembamarine highlighting that when the merger between the two is complete, they will see a combined value of nearly $10 billion worth of orders year-to-date (ytd). “In our view, this bodes well for the merger which is expected to be completed by 4QFY2022.”
As of 11.06am, shares of Keppel, Sembmarine and Yangzijiang were trading at $7.21, 11.7 cents and 97 cents respectively.
