Sunday 11 December 2011

Keppel & SembMar

OCBC Research, Thu, 8 Dec 2011,

The FTSE Oil and Gas index has been outperforming the broader market till the global sell-down in Aug, during which this higher-beta sector suffered under the prospect of a poorer-than-expected global economic outlook. However, the spread has narrowed in the past two months with increasing market realisation that offshore activities remain robust as the favourable oil price environment is conducive for capital expenditure. Stepping into 2012, we expect the local rigbuilders to continue securing orders, albeit at a slower pace. The offshore support vessel sub-sector should also see a continued recovery as the oversupply situation for certain segments runs its course. Meanwhile, tendering activity in the subsea sub-sector is firm. Maintain OVERWEIGHT as the offshore sector has strong long-term fundamentals; countries also have an interest in fulfilling as much domestic oil demand as possible to boost energy security. We prefer Keppel Corporation [BUY, FV:S$12.02] and Sembcorp Marine [BUY, FV:S$5.63], while Ezion Holdings [BUY, FV:S$0.97] is an attractive small-mid cap play.

A tale of two halves… almost. The FTSE Oil and Gas index broadly tracked the STI till early Mar then divergence emerged when the oil and gas index outperformed the broader market. The outperformance continued till the global sell-down in Aug which was led by the historical downgrade of the US government credit rating by S&P, as well as concerns over the Eurozone’s debt situation. The higher beta oil and gas stocks suffered under the prospect of a poorer-than-expected outlook for the global economy, but the spread between the FTSE Oil and Gas index and the STI has narrowed in the past two months with increasing market realisation that offshore activities remain robust as the favourable oil price environment is conducive for capital expenditure in the sector.

Stick with a bottom-up approach. A focused stock-picking strategy would have fared relatively well in 2011, and we would stick to a similar style in 2012, overweighting companies that are operating in sub-sectors with more favourable demand-supply dynamics, have strong balance sheets and order books to weather a downturn. We see credit tightening as a key risk for the sector, given the capital intensive nature of the business. Stepping into 2012, we expect the local rigbuilders to continue securing orders, albeit at a slower pace compared to 2011’s newbuild rush. This excludes Petrobras’ orders, which may be awarded by 1Q12. The offshore support vessel sub-sector should also see continued recovery as the oversupply situation for certain vessel segments runs its course, resulting in more favourable utilisation and day rates. Meanwhile, tendering activity in the subsea sub-sector is firm, though benefits to contractors in terms of earnings contribution may not be felt in the near term.

Strong long-term fundamentals; energy security is the key. We believe that the offshore sector has strong long-term fundamentals as countries have an interest in fulfilling as much domestic oil demand as possible, in order to boost energy security. In Asia, this does not just apply to China and India, but also to places such as Malaysia and Indonesia which face production declines if they do not increase investments in this industry. Going into 2012, we remain OVERWEIGHT on the oil and gas sector, preferring Keppel Corporation [BUY, FV: S$12.02] and Sembcorp Marine [BUY, FV: S$5.63]. Ezion Holdings [BUY, FV: S$0.97] is an attractive small-mid cap play. 

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