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Summary of Offshore & Marine Sector Analysis

Core Content

The offshore and marine sector is currently facing near-term headwinds that may impact rig order momentum. The analysis focuses on the implications of these challenges for large-cap rig builders and the OSV (Offshore Support Vessel) segment. The sector's long-term fundamentals remain intact, with continued demand for deepwater development and exploration activities.

Main Points

• Sector Rating Downgrade: The offshore and marine sector is downgraded to NEUTRAL from OVERWEIGHT due to the temporary slowdown in rig order momentum.
• Rig Order Momentum at Risk: Major oil companies are cutting 2014 spending, and dayrates for deepwater floaters are softening, which could lead to reduced new rig orders for the next 6-12 months.
• Impact on Shipyard Stocks: Shipyard stocks are primarily driven by order backlog, and a slowdown in orders will likely result in muted share price performance.
• Valuation Framework Change: The report recommends switching to P/BV (Price to Book Value) and EV/Backlog valuation models to better capture the cyclical nature and backlog dynamics of the sector.
• OSV Opportunities: The OSV segment is expected to benefit from the influx of new rigs and increased subsea construction activity. The OSV-to-rig ratio is projected to decline from 4.36 to 3.89 by 2015, indicating tighter supply.
• Chinese Shipbuilders: Recovery for Chinese shipbuilders is expected to be mild and fragile. The sector has bottomed out, but a rebound is anticipated in 2015. The report maintains a HOLD on Yangzijiang and a SELL on Cosco due to company-specific issues.
• Stock Call Adjustments: Keppel Corp and Sembcorp Marine are downgraded to HOLD from BUY. The report maintains BUY calls on Nam Cheong, Yard, Ezion, and Mermaid Maritime.
• Industry Fundamentals: Long-term fundamentals remain strong, with oil prices at a sustainable level and continued demand for deepwater exploration and production.
• Supply Glut and Utilization: The supply glut in deepwater rigs is expected to ease over the next 18 months, with a potential U-shaped recovery in the industry.
• OSV Demand Drivers: The demand for OSVs is expected to increase as new rigs enter service and sanctioned projects move into development, leading to higher utilization and tighter supply.

Key Information

• Valuation Models: The report introduces a new P/BV and EV/Backlog valuation model to better reflect the cyclical and backlog dynamics of the sector.
• Order Win Forecasts: Order win forecasts for Keppel and Sembcorp Marine have been revised downward, with Keppel's order win reduced from SGD6.2b pa to SGD5.5b pa.
• Rig Market Outlook: International drillers such as Noble Corp, Transocean, and Ensoco anticipate a challenging 2014 and 2015 environment due to oversupply, but remain optimistic about long-term recovery.
• OSV-to-Rig Ratio: Based on Pareto estimates, the OSV-to-rig ratio is expected to fall from 4.36 to 3.89 by 2015, tightening supply and increasing demand.
• Regional Demand: Demand for OSVs may be higher in regions like Malaysia and Indonesia due to local regulations and the lack of locally-flagged or owned vessels.
• Newbuild Pace: The newbuild pace for OSVs is lagging behind that of rigs, creating an opportunity for OSV shipyards to expand their fleets.

Stock Call and Target Price Changes

Analyst

• Yeah Chee Keong, CFA
• Contact: (65) 6432 1460
• Email: yeakcheeong@maybank-ke.com.sg

Investment Thesis

• Focus on stock price drivers, particularly order backlog and cyclicality.
• OSV sector is viewed as a more positive opportunity compared to rig builders.
• Chinese shipbuilders are not yet a positive investment due to mild recovery and structural fragility.
• The P/BV and EV/Backlog models are preferred for better valuation accuracy.

Industry Outlook

• Short-term Concerns: Oil companies cutting capex and softening dayrates for deepwater floaters are the main headwinds.
• Long-term Fundamentals: Oil prices remain at a sustainable level, and offshore deepwater development is expected to continue.
• Supply Glut: Oversupply in the deepwater rig market is expected to ease over the next 18 months, with demand likely to return as the replacement cycle continues.
• OSV Demand: Expected to rise due to increased rig fleet size and subsea development activities.

Conclusion

The offshore and marine sector is currently facing a cyclical pause due to short-term challenges, but long-term fundamentals remain strong. The report advises a neutral stance on large-cap rig builders and recommends focusing on OSV opportunities. The shift in valuation models and stock call adjustments reflects the changing dynamics of the industry and the need to better capture the impact of order backlog and cyclicality on stock performance.