O&M/Yangzijiang

O&M/Yangzijiang: Market sentiments among rigbuilders may have improved recently, after underperforming their country indices for last 12M, but Goldman cautions bottom fishing is premature as:
1. Strong oil demand may not last given China’s softening economic activity and fuel subsidy removals in many countries
2. Oil supply remains high near-term with more production and capex cuts needed
3. New rig supply remains near historical high, with more rigs currently docked ready to make a comeback at any sign of increased drilling activity
4. Rig attritions, though accelerating, are still insufficient
5. Even NOCs are cancelling contracts, putting orderbook visibility and outlook at risk
6. Valuations are not attractive compared to historical instances of low oil price environment

In fact, project cancellations and defaults are on the rise. Traditionally “safe haven” NOCs such as Petrobras, Pemex and Saudi Aramco have invoked early termination clauses.

Overall sector rating is underweight, with a preference for stocks with lower rig/orderbook exposure. GS recommends Sell on Malaysia’s UMW Oil & Gas and Singapore’s COSCO, Hold on Sembcorp Industries, Keppel Corp, Sembcorp Marine, Vard and Buy on Yangzijiang.

Yangzijiang is liked for its high commercial shipbuilding exposure, low valuations and company-specific catalysts.

Last Friday, the Upstream magazine reported Yangzijiang is in “advanced talks” to acquire a stake in another state-owned shipbuilding China Rongsheng. YZJ has since clarified that it is merely approached by the government to explore and consider taking a stake in Rongsheng but is neither in advanced talks nor has made any decision.

In our opinion, however, there is a high chance a deal will be struck as the suggestion was initiated by the government.