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Tuesday, March 31, 2015

Oil & Gas - Offshore Support: The sun is setting for now

We initiate coverage on Singapore's O&G Rig/OSV owners (Offshore Support) with an UNDERWEIGHT rating: Pacific Radiance (HOLD), Nam Cheong (SELL) and Ezion (HOLD). We estimate they may still have 10-30% more downside to reach valuations comparable to global peers. International rig and OSV operators (Transocean, Seadrill, Ensco, Tidewater, Hornbeck) elsewhere are trading at 50% avg discount to their book values (even after massive write-downs in recent quarters) compared to SG companies' 20% discount (without any write-downs so far).

Earnings unreliable for now
Valuation using earnings for rig/OSV owners is a little tricky due to the risks of order cancellations and dayrate renegotiations in this current environment. Our base case assumes low oil prices to persist this year leading to more capex cuts by upstream companies. This in turn could lead to contract renegotiations or in some instances, contract cancellations (Saudi Aramco and Pemex, both NOCs and deemed resilient in downturns, are cutting costs and cancelling contracts).
Difference in consensus estimates is as wide as the Pacific Ocean
The two top consensus calls in mid-cap energy sector – Ezion and Pacific Radiance – have earnings estimates that range as wide as 50% for FY15 and FY16, according to Bloomberg data. This basically shows the difficulty in trying to estimate earnings when volatility in oil prices is causing uncertainty for companies’ operations and expansion plans. Nevertheless, we still used earnings multiple for the three companies in this sector report because we expect these companies to remain profitable.
O&G companies may have 10-30% more downside
Casting earnings based valuations aside and utilising P/B ratios of international rig and OSV operators, we see Singaporean Rig/OSV owners having 10-30% more downside to reach valuations that are comparable to their global peers that are trading at 40-60% discount to their book values, in spite of the massive write-downs these global companies have taken in past quarters.
Asset values as a floor guide
We see the 10-30% downside values as providing a floor in this oil industry down cycle. Companies with higher net gearing levels (net debt to equity ratio) could face even higher downside risks if they have to take write-downs on assets. Listed companies utilise high levels of borrowings to fund their asset purchases (except CH Offshore) and hence magnify their risks when cash flows come under pressure upon contract cancellations. The net gearing of Singapore O&G asset owners ranges from 50% (Pacific Radiance) to 250% (Vallianz). We believe those with net debt higher than 100% (e.g. Ezion, Swiber, Vallianz, Swissco, Marco Polo, Ezra) could face severe headwinds as we see lower dayrates affect the companies in 2H15. (Read Report)

Source : KGI Fraser Research

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