UOB Kay Hian analyst Adrian Loh has maintained “overweight” on the offshore and marine (O&M) sector as he sees the sector moving “onwards and upwards”.
“The rig market appears to have turned a corner in 2021 with oil prices exceeding US$80 ($107.50) per barrel – this has resulted in stronger rig utilisation rates and a firming of rig dayrates vs 2020,” writes Loh in his Jan 14 report.
“The higher offshore activity expected in 2022 and 2023 underpins our positive view on the sector, especially given that meaningful rig supply was removed globally,” he adds.
In 2021, competitive utilisation for offshore rigs rose strongly, exceeding the highs seen pre-Covid-19.
“With the higher utilisation numbers, we believe that dayrate numbers should follow and incentivise rig owners to place new orders. Already we have seen firmer rig dayrates on a y-o-y basis. We also note that particular regions like Brazil saw utilisation rates exceed 90% in 2021,” says Loh.
Global offshore activity is also likely to pick up in 2022 and 2023, with demand for production assets looking to have “meaningful upside” in the next few years, which could be positive for Keppel Corporation and Sembcorp Marine.
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“According to Rystad Energy, offshore investments in 2022 are set to increase by 7% y-o-y from US$145 billion to US$155 billion. In addition, we highlight that the US$150 billion of greenfield projects sanctioned in 2021 (2020: US$80 billion) will likely be repeated in 2022, thus underlining the positive outlook for the offshore marine sector in the short to medium term,” he adds.
To this end, should activity in the oil and gas industry strengthen in 2022 and 2023, Loh says the sector can expect to see a cyclical upturn start in the near term. This is also based on the assumption that governments are able to view the Covid-19 virus as endemic amid less lethal variants.
Finally, the global offshore rig count fell 7% y-o-y to 716 rigs. Around 42 rigs were sold for scrap or conversion with semi-subs registering the largest supply destruction in percentage terms, down 12% y-o-y to 104 rigs.
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“In our view, this is positive for the industry as the extraction of excess supply should allow utilisation and dayrates to firm up going forward,” says Loh.
Within the sector, Loh has identified Yangzijiang, Keppel Corporation and Sembcorp Marine (SembMarine) as his top picks.
Yangzijiang, which remains inexpensive at FY2022 P/B 0.6 times, will see margin expansion in the next few quarters. Keppel Corporation has undemanding valuations and has potential positive newsflow on its merger or divestment of its O&M business unit. SembMarine’s risk-reward is skewed to the upside after its successful $1.5 billion rights issue in 2021. The latter could also benefit from the upcoming upcycle as Singapore’s largest offshore marine company, says Loh.
UOB Kay Hian has given Yangzijiang, Keppel Corporation, SembMarine and Sembcorp Industries “buy” calls with target prices of $2, $6.74, 11 cents and $2.59 respectively.
Photo: SembMarine
