Offshore & Marine Sector

Kim Eng on 4 Sept 2014

• Cycle now favours oilfield service asset owners with high-quality assets. Industry’s production push to profit OSV supply chain. Time to position in selective OSV operators.
• Initiate coverage of PACC Offshore (POSH SP, TP SGD1.26) and Pacific Radiance (PACRA SP, TP SGD1.74) with BUYs.
• Sector still a Neutral in view of HOLD ratings for large-cap rigbuilders. Top picks are Ezion, POSH and Pacific Radiance.

Stage of cycle to benefit oil service players with right assets. We forecast average FY15E-16E EPS growth of 41%/37% for OSV asset owners under coverage: POSH, Pacific Radiance, Ezion and Mermaid Maritime. Their margin expansion in this and later stages of the cycle could drive a valuation re-rating, in our opinion.

Growth shifts to OSVs. With their depleting oil fields, oil companies are under pressure to focus their spending on undeveloped fields, to bring them into production. This will require increasing support from OSVs, including pipelay vessels, liftboats and construction vessels.

OSV shipyards first to benefit... In anticipation of this upturn, OSV operators have started to place newbuild orders, to ensure they have the youngest and right assets to meet demand. This should first benefit OSV shipyards, Nam Cheong (BUY, TP SGD0.55) and Vard (BUY, TP SGD1.25). Order momentum for both has been good, with both optimistic on their future order wins.

… followed by asset owners. Asset owners with newer and better vessels should be preferred by the oil companies. OSV operators with the right fleets should edge out those slower to optimise their fleets. We initiate coverage of POSH (BUY, TP SGD1.26) and Pacific Radiance (BUY, TP SGD1.74). We believe these two have the correct mix of assets to be lifted by the rising tide.
Next in line are maintenance providers. More offshore platforms and subsea pipelines and a bigger infrastructure will require more maintenance and subsea IRM (inspection, repair and maintenance) work. This should benefit Ezion (BUY, TP SGD2.85) and Mermaid Maritime (BUY, TP SGD0.60).
NEUTRAL because of large-cap rigbuilders. We are overall Neutral on the sector because of our HOLD ratings for the large-cap rigbuilders: Keppel Corp, Sembcorp Marine and Sembcorp Industries. However, we see opportunities for the small-mid-cap asset players.