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Wednesday, September 10, 2014

Oil & Gas Sector - Singapore round-up: Cautious but prospects still bright OVERWEIGHT


- We visited oil & gas companies in Singapore last week, which included Keppel Corp, Sembcorp Marine, Ezion Holdings, Ezra Holdings and PACC Offshore Services Holdings (POSH). Operators in Singapore remain largely optimistic about the global rollout of projects although there is some degree of cautiousness given the slowdown in awards stemming from tender deferrals, engineering complexities and cost escalations. But fabrication yards there appear to be less concerned about the rise of competition from China given delivery delays and quality issues encountered by some operators. In some notable cases, newly-built rigs in China had to be upgraded or modified in Singapore before being deployed elsewhere.

- We note that the order book for fabrication yards Keppel Offshore & Marine and Sembcorp Marine remain near their peak levels of S$14.1bil and S$12.7bil, respectively, but the growth in new orders appear to be decelerating. For Keppel, its new order accretion has slowed from S$10bil in FY12 and S$7bil in FY13 to only S$3.2bil in 1HFY14. Likewise, for Sembcorp Marine, its new order flows have slowed down from S$11bil in FY12 and S$4.2bil in FY13 to only S$2.5bil in 1HFY14.

- Notwithstanding the slower orders, both yard operators remain optimistic about prospective order flows from the Gulf of Mexico, the Middle East, Brazil, West Africa and the Southeast Asian region. While both companies remain as the leading global fabricators for jack-ups and semi-submersibles, we note that the group strategies remain slightly different, with Sembcorp Marine constructing nine drill-ships, of which two are under its own proprietary design. Keppel, on the other hand, has ventured into converting two carriers into floating liquefied natural gas vessels for Golar LNG.

- Ezra expects its earnings growth to accelerate on three fronts: 1) from lower cost of its currently deployed vessels by exercising its sales and leaseback options, against the backdrop of more expensive newly-built units, 2) Subsea construction growth and stronger margins under Aker Marine Contractors, and 3) dual listing of EOC Ltd in Singapore and Norway, which will restructure the group’s operations and streamline its cost structure.

- POSH views that demand for larger vessels such as anchor handling tug supply (AHTS) vessels with engine capacities of over 10,000 brake horse power remains firm as new supply in this category is limited. But the company expects pressure on AHTS and platform supply vessels with lower engine specifications amidst intensifying competition and lower cost vessels being built in China. Hence, POSH, which operates 110 vessels, has contracted to build 19 new vessels and planning another 15.

- Ezion is rapidly expanding its fleet of lift-boats/service rigs by 15 to 37 units in FY16F with an outstanding capex of US$500mil and which have already secured charter contracts. One of its rigs, Unit 9, is expected to be chartered very soon in Malaysia on a 5-year contract in a 50:50 joint-venture with local operators, which may include Alam Maritim Resources.

- In Malaysia, there are multiple EOR projects in the pipeline involving central processing platforms such as those for the Kasawari, Sepat, and Guntong fields that are up for grabs. While packages for the Refinery and Petrochemical Integrated Development in Pengerang, Johor has been recently awarded to multiple foreign contractors, there is still likelihood that some of the smaller jobs may be awarded to the local yards. Hence, we maintain our OVERWEIGHT view on the sector with BUY calls for SapuraKencana Petroleum, Bumi Armada, Petronas Gas, and Alam Maritim Resources. We have a HOLD recommendation for Dialog Group and SELL for MMHE due to poor earnings delivery.

Source: AmeSecurities

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