Offshore & Marine

Kim Eng on 18 Dec 2014

• Oil-price slump worse than feared. Entire value chain now vulnerable. Focus on balance sheets and cash flows.
• Order-cancellation risks. Cut FY15E-16E EPS for asset owners/operators by 8-19% for lower pricing.
• Maintain UNDERWEIGHT with above as de-rating catalysts. For sector exposure, opt for Ezion.

What’s New
As Brent crashes through USD60/bbl, we revisit our estimates, already cut for some on 20 Nov 2014 in our sector downgrade. We cautioned previously that oil services stocks have 25% further downside if Brent sticks below USD80/bbl for a sustained period, which appears to be playing out. Any oil-price reversal would likely be in 2H15, in our opinion. Operators with strong balance sheets and cash flows should be better positioned in the longer term, as the weaker players are weeded out.

What’s Our View
With Brent at USD60/bbl or so, we now believe the entire value chain is vulnerable. Expectations of insulation against oil price dip for certain players are being tested as cracks emerge. Weaker players may start to operate on cash flows over profitability, sabotaging the whole industry’s margins. After scrutinising the balance sheets and cash flows of Singapore O&M stocks, we conclude that most have the financial wherewithal to weather this downturn. We flag Cosco’s and Swiber’s high gearings and weak cash flows, compounded by operational weakness.

Asset owners could favour utilisation rates over pricing. After cutting OSV rates by 4-17%, we lower FY15E-16E EPS for PACC Offshore and Pacific Radiance by 11-19%. As we believe Nam Cheong may lower prices to ensure vessel sales, we cut sale prices by 5% and shipbuilding margins by 2ppts. This results in 11-12% FY15E-16E EPS cuts. Separately, we also cut TP for Vard from SGD0.71 to SGD0.65 due to NOK/SGD currency changes. Valuations look increasingly attractive, justifying our long-term BUYs for well-positioned players. But stocks could take another beating before recovering, as the industry comes to grips with a lower-oil-price environment.

Maintain sector UNDERWEIGHT. For exposure, still prefer Ezion for its stronger earnings visibility. Risks to our views include a sharp bounce in oil prices that could be triggered by: 1) supply cuts by oil producers; and 2) improved demand expectations.