The offshore and marine (O&M) sector has been overlooked for most of 2017 as negative sentiments gripped the market owing to the low oil price. However, with oil prices recovering year-to-date, CIMB believes that it is time to review the sector. According to CIMB, the O&M sector is prime for a re-rating.
Oil Market Rebalanced; Crude Oil Prices Recovering
In its recent Short-Term Energy Outlook (STEO) report published in November 2017, the Energy International Agency (EIA) forecasts that for FY17, the global market would be at slight marginal production deficit. This means that average world consumption has slightly overtaken the average world supply, which is a great improvement from the supply glut in 2015. This suggests that OPEC and Russia’s strategies to curb crude oil production have taken effect, resulting in the recovery in oil price.
OPEC Could Extend Production Caps
Moving forward, CIMB pointed out that OPEC has a strong case to extend its production caps beyond March 2018 to buoy oil prices. The first reason is to keep sentiments in the oil market positive for the listing of Saudi Aramco’s unit that has been slated for 2018.
Secondly, shale is still very much in the game despite traditional US oil production volume still trending upwards, albeit tightly. As such, OPEC has the incentive to keep oil prices higher, in order to support traditional oil production and hence keep US shale at bay. In addition, the EIA forecasted that world production would exceed world consumption by an average 0.1 million barrels per day in FY18 which would also encourage the OPEC to reduce output.
O&M Players Consolidating To Emerge Stronger, Leaner
CIMB notes that mergers and acquisitions have been gaining traction during 2017. CIMB believes that this is an early indication that O&M players are consolidating or tying up to emerge bigger and leaner in anticipation of sector recovery. Such consolidation will shrink the industry and give oilfield service players more influence when it comes to contract awards.
Investors Takeaway: Preference For Large Caps Over Small Caps
CIMB notes that crude oil price has recovered to close to some offshore projects’ average breakeven levels. With limited downside to the sector, CIMB recommends adding Singapore yards to catch the rally in the O&M sector. CIMB believes that the large caps will be first beneficiaries of the upcoming production and gas contracts. Moreover, impairment risks for large caps are largely mitigated.
In the past two rig upcycles (between 2004 to 2008 and 2009 to 2011), large-cap O&M stocks’ valuations have risen more than 200 percent. CIMB also points out that their valuations are currently near the bottom.
Since the beginning of 2017, Sembcorp Marine has secured $270 million worth of orders, excluding two Letters of Intent from SeaOne. Moreover, there is still upside to CIMB’s forecast as Sembcorp Marine is in the running for some sizeable projects that are likely to be awarded in 2018. This could help Sembcorp Marine stage an earnings surprise. Order wins will be a key catalyst in the short term to lift Sembcorp Marine nearer to its historical valuation. Currently Sembcorp marine is trading at about 20 percent discount to its 20-year average price-to-book value of 2.5 times.
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