Monday, January 19, 2015
SMM - Market Insight had an O&M posting on Friday, where we note that a 55% plunge in oil prices, oil producers as well as midstream E&P players have endured heavy sell-offs. But while some offshore-related stocks appear to have borne the brunt of the carnage, others are stubbornly clinging on to fading hopes that oil will rebound back to the US$70-80 per barrel levels or that their business will somehow be able to weather the storm. If oil continues its downtrend or even stays at the current price of US$45-50 a barrel, many offshore projects will be unviable, putting a substantial proportion of deepwater or high cost E&P activities at risk. As such, we can expect more international oil companies to cut exploration budgets and scale back or delay development capital expenditure in 2015. Of the capex cuts announced thus far, the range hovers between 20% and 50%. For instance, Malaysian state oil firm may slash its capital investments by up to 30%. This will put utilisation and day rates under pressure at a time when the number of new rigs deliveries hitting the market is near a peak. Hence, we can expect delayed payments, renegotiation of payment structure or in a worst case scenario, project cancellations. As a foretaste of what is to come, Brazilian oil giant Petrobras-sponsored rigbuilding unit Sete Brazil is said to owe Keppel BrasFELS as much as US$500m in delayed payments. With banks now tightening financing on energy players. The double whammy of lower earnings visibility and credit tightening put highly geared offshore services players, such as Swiber and Ezra, at possible risk of financial stress. Looking at the big caps, both Keppel Corp (Keppel) and Sembcorp Marine (SMM) have skidded ~26% to $8.03 and $2.94 respectively since Jun 2014, while WTI crude slumped 58% to US$46.25 during the same period. The last time WTI was at these levels in 2008 and 2004, Keppel was hovering between $3.50 and $4.50, while SMM was trading below $2.00. However, it may be worth noting that both Keppel and SMM are in a stronger position now, backed by thick order books of ~$12.6b, which will give earnings visibility for the next two years to tide over the crude oil crisis. New orders continue to stream in for Keppel in the FLNG and ice-class vessel spaces. Apart from winning a US$705m FLNG conversion contract from Golar in late Dec, the group has also clinched a $265m contract to construct an ice-class multi-purpose vessel for Luxembourg-based Maritime Construction Services, making it its fourth ice-class vessel currently on order. Furthermore, both Keppel’s and SMM’s order mix is more skewed towards FPSO/FSO and FLNG conversions. These are production assets, which are typically tied to long term production schedules. Maybank-KE currently has a Hold rating on Keppel with TP of $9.00 and a Sell on SMM with TP of $2.65. Overall, the house is Underweight on the O&M sector, with Swiber deemed the most vulnerable (high gearing, weak cash flows, operational weakness) and Ezion the most resilient (earnings visibility due to long-term charters, strong cash flows).