Offshore & Marine – Singapore Key Takeaways From Luncheon Presentation By Shipbroker M3 Marine
- OSV tender activities are recovering gradually, as companies recover from their shell shock in the aftermath of the oil price collapse.
- Oil companies have asked for a 30% reduction in dayrates while OSV owners have reciprocated with 10-15% cuts. The industry downturn has not bottomed yet, but an industry-wide cost cutting is the silver lining.
- Our top picks remain SCI, Ezion Holdings and Triyards.
- Maintain MARKET WEIGHT.
WHAT’S NEW
Our key takeaways from shipbroker luncheon presentation are as follows:
Bottom to the downturn not in sight.
- The current downturn is earnest and yet to bottom. The 2009 downturn was an aberration; the current one has greater similarities to the 1985 downturn which saw large number of retrenchments, a lack of vessel jobs, and an oversupply of vessels and rigs.
- Shipyards remain quiet and though large numbers of rigs and vessels remain under construction at Chinese yards, everything is being purposely delayed.
- Defaults have yet to occur as yards and customers form mutually beneficial agreements in this difficult environment. However, a tipping point will come where cheap asset opportunities will arise.
Contracts are not water tight.
- Oil companies are still asking for dayrate reductions. Despite the lower dayrates currently offered, offshore support vessels (OSVs) remain operationally profitable. Profitability hinges on three factors:
- when the investment was made,
- funding cost, and
- operational expertise.
- The platform supply vessel (PSV) market is weakest because of a huge orderbook.
- Two years ago, a small PSV could be built for US$14m at a Chinese yard and sold for US$25m. The trading price of such a newbuild has since fallen to US$16m, close to the build cost.
- Dynamics are different for different vessel types.
- Yards are taking orders at zero margins.
Indonesia: Still in a funk.
- Three years ago, there was a rush to build vessels in Indonesia. Fast forward to present, the OSV market has gone south, affected by a new government regime, the corruption scandal at SKK Migas and the oil price collapse.
- OSV owners have been forced to deploy vessels to overseas markets such as Myanmar. However, Indonesia needs to offset declining oil production rates and will make a comeback.
- Gas production remains robust in the region and will be a driving factor in offshore activities.
Malaysia: Higher activity levels, lower dayrates.
- Tendering activities are recovering with OSV demand coming from Petronas, Murphy and Nippon Oil.
- Current activity level has risen compared to a quarter ago, but remains at half the levels from a year ago.
- Vessel tenders are for jobs between 3Q15 and mid-16, with more projects on bid for 2016’s execution.
- Dayrates are down: a 5,000bhp AHTS fetches US$7,500/day vs US$9,000/day previously, while 8,000bhp AHTS fetch US$9,000/day vs US$16,000/day.
- Oil companies in Malaysia have asked for 30% rate reductions and cost breakdowns. OSV owners are offering 10-15% rate reductions for existing charter contracts. Renewals are seeing steeper cuts.
Middle East and India: Work available at the right price.
- While Saudi Aramco is keeping up spending, it has asked for steep rate reductions.
- Iran is expected to add to offshore activities once it comes on stream. India is stepping up activities but dayrates are low.
North Sea – Overbuilt and overspec’ed.
- Norwegian flagged vessels require Norwegian crew, which restrict their ability to work in foreign markets requiring local content. Although these vessels can be reflagged, the high build cost of these vessels makes profitability an issue for overseas deployment.
- North Sea rates are comparatively higher than other markets. For example, a Chinese-built 5,000dwt PSV goes for US$30m, as compared with a Norwegian-built 4,000dwt PSV for US$50m. A Norwegian-built 4,000dwt PSV has since fallen to US$33m due to depreciation of the Norwegian Kroner, but remains expensive.
US Gulf of Mexico and Australia.
- US Gulf is a closed shipping market - due to the Jones Act - is applicable only to OSVs; rigs and subsea vessels are affected.
- Australia remains an expensive market because of its unionised workforce.
- We learn that even without the employment of an Australian crew, foreign crew members have to be on an Australian visa, which places them under the minimum wage law of US$2,000/day.
- As such, using a 4,000dwt PSV as an example, the dayrates would be US$35,000/day for Australia vs US$15,000/day for Asia.
Cost cutting: the great thing that's happening.
- The whole industry is targeting cost reductions of 30-40%. High costs are rampant throughout the entire industry. Companies are more circumspect in cutting vessel operating costs as they are income generating assets, and have focused on reducing overheads.
- Nevertheless, significant crew cost savings can be realised owing to vessel manning requirements that have gone beyond contractual requirements of oil companies, class and flag requirements.
- Costs had previously skyrocketed because of an excessive focus on safety requirements, which resulted in the over-employment of safety crew members.
ACTION
No place to hide. Maintain MARKET WEIGHT.
- We retain our stock recommendations and maintain MARKET WEIGHT on the sector. Our target prices are based on a 1-year forward P/B methodology.
- The global O&G industry faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry − among oil companies, service providers and shipyards.
- 4Q14 and 1Q15 saw a fall off the cliff.
- While activities are returning, oilfield services companies are expected to post poor earnings performance for 2Q15. A meaningful recovery might be seen only in 2H15.
- In the meantime, stock prices of mid- and small- cap oil service stocks have fallen close to cyclical trough valuations of 0.5x.
- Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards.
ASSUMPTION CHANGES / CATALYSTS / RISKS
Oil price the key risk.
- Two key risks in the sector are:
- protracted low oil prices, and
- another fall in oil prices.
- Both would significantly impediment future capex spending, which needs to rise to return activity levels to post-crash levels.
STOCK RECOMMENDATION
(Nancy Wei, Foo Zhiwei)
Source: http://research.uobkayhian.com/
