UOB Kay Hian analyst Adrian Loh is expecting 2023 to be a good year for the offshore & marine (O&M) sector.
“In 2023, we expect the global rig market to continue the strength seen in 2022 with higher utilisation and day rates,” he writes in his Jan 31 report, keeping his “overweight” rating on the sector.
Competitive utilisation rates surged in January to above 80%, which is a level that was not seen before 2018. This is also despite the fact that the number of active rigs increased by 8% y-o-y, Loh points out.
“While aggregate jack-up dayrates are flat on a y-o-y basis, industry reports indicate that dayrates for high-specification jack-ups have hit five-year highs of nearly US$140,000 ($185,772)/day while semi-subs and drillships have seen dayrates increase by 6%-47% y-o-y,” adds Loh.
With higher utilisation rates, come more rigs across the three asset classes that have been reactivated.
“In particular, warm-stacked rigs, which are cheaper to reactivate versus cold-stacked rigs, have declined by between 16%-47% y-o-y,” the analyst notes. “As a result, there are currently 446 rigs drilling globally versus 400 in January 2020, with only 102 uncontracted rigs at present vs 252 in 2019.”
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13% CAGR estimated for offshore upstream capex
For the period over 2021 to 2024, IHS Markit has forecasted a compound annual growth rate (CAGR) of 13% for offshore upstream capex, after a multi-year decline between 2015 to 2021.
Loh adds that other industry surveys are more positive on the growth rate with a 24% y-o-y increase in 2023, compared to the 12% y-o-y growth in 2022.
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Even though some of the capex increase is inflation-related, Loh notes that there are over 180 offshore projects that will require floating production and or storage systems which would benefit Sembcorp Marine (SembMarine) and Keppel Corporation.
SembMarine and Keppel Corp are Loh’s top picks. The analyst notes that both groups have seen a combined total of over $15 billion worth of orders in 2022. “In our view, this bodes well for the merger which is expected to be completed in the next few months, especially given that the transaction has now been made much simpler,” he says.
Loh has given both SembMarine and Keppel Corp “buy” calls with target prices of 15.6 cents and $10.11 respectively.
Oil demand expected to grow
Oil demand is also expected to grow, says Loh, with the US Energy Information Administration (EIA) forecasting growth of 1.0 million barrels per day (mmbpd) for 2023 and 1.7 mmbpd for 2024 in its January report. However, the agency adds that its forecasts face heightened uncertainty due to ongoing concerns about global economic conditions as well as the easing Covid-19 restrictions in China.
Downside risks to Loh’s thesis include delays in the sanctioning of projects due to supply chain inflationary pressures as well as a lack of financing for industries that are seen to be related to the fossil fuel industry.
The possibility of oil companies focusing on share buybacks or paying dividends instead of remaining committed to offshore capex is also another potential downside risk, says Loh.
As at 1.54pm, shares in SembMarine are trading 0.2 cent lower or 1.43% down at 13.8 cents. Meanwhile, shares in Keppel Corp are trading 7 cents lower or 0.98% down at $7.11.
