Offshore and Marine Sector

DMG & Partners Research on 12 March 2012

THE offshore & marine (O&M) sector has performed well since the start of the year with share prices up 15-36 per cent year-to-date. PE valuations have expanded 40-70 per cent from its low in 2011, but current valuations at 13-17 times are well below peak of 25-30 times seen in the last upcycle.

We see reasons to remain bullish: 1) Underlying market drivers remain positive: world oil demand is growing, oil prices remain above US$100 per barrel and E&P (exploration and production) spending outlook is bullish; 2) Rising charter rates and attractive payback period are likely to draw renewed interest for newbuild drilling rigs; and 3) Petrobras offers more opportunities than just the deepwater rig projects.

In our view, Keppel O&M and Sembcorp Marine (SMM) are well positioned for more big-ticket wins. Maintain 'overweight' on the sector with Keppel Corp as our top pick. Most of the oil majors and national oil companies have declared higher capital expenditure (capex) in 2012. On aggregate, we estimate capex spending to be higher by 6-10 per cent y-o-y. Singapore yards have turned more positive: enquiries for newbuild rigs are much higher now compared to three months ago. We believe this will lead to more offshore orders.

Day rates for semi-submersible rigs and high-specs jack-up rigs have increased by 20-30 per cent in the past 12 months while utilisation rates for newer rigs are hovering around 90-100 per cent. As payback period for newbuild rigs remains attractive between 5.7 and 7.5 years, we believe rig owners will come back to the yards sooner rather than later.

We are switching our top pick to Keppel Corp. We reiterate our preference for big-cap O&M stocks given their direct exposure to the Petrobras-related jobs. Since the start of the year, our top pick, SMM, has risen 36 per cent year-to-date. We now have Keppel Corp as our top pick simply due to a higher upside and it being a laggard to SMM.

We would avoid Chinese shipbuilders as poor outlook for commercial shipbuilding and depressed margins on new contracts could hit FY13-14 forecast earnings. Key risks to our recommendation are: 1) a severe debt crisis; and 2) steep decline in crude oil prices.
Sector - OVERWEIGHT