Offshore & Marine - Different times, different tides

■ Stocks heavily discounted but EPS cuts not over. No urgency to turn outright positive.

■ Cost recalibration to return offshore services to viable longterm profitability. Expect an uneven recovery, led by wellfunded asset owners with opex and production exposure.

BUYs on Ezion and Pacific Radiance as early recovery plays.

What’s New
We see a more gradual Brent recovery to USD70-75/bbl by 2017, given slow supply response, influence of shale and geopolitical risks. Further cuts to industry capex cannot be ruled out if oil price stays lower for longer, as hedges have shielded many oil companies from the full blow for now. Knowing we cannot accurately call the oil-price cycle, we simply seek to identify oversold stocks which may warrant early fundamental long positions.

What’s Our View
Oil services will eventually stage a comeback, but expect cost recalibration and consolidation to feature heavily in the recovery, inflicting short-term pain to all service providers. At the current stage, players with opex and production exposure may still benefit from oil companies enhancing existing fields for quick paybacks. Against this backdrop, we prefer maintenance providers and OSV owners with production-focused fleet. These players are also more likely to lead a cyclical rebound, although beneficiaries would be restricted to a narrower group, as over-leveraged and weak players may not hold out. We least prefer rigbuilders given their high exposure to capex and offshore drillers.

Greater clarity has emerged on revenue following a disappointing 1Q15 earnings season, but margins and therefore EPS remain hard to predict. We believe that EPS downgrade cycle has not ended and our FY15-16 EPS are 11-14% below consensus. We have thus switched all P/E valuations over to P/BV. In estimating if stocks are sufficiently priced for the bottom, we cross-reference P/BV valuations with replacement value for selected asset owners.

We continue to like Ezion for its more resilient opex exposure and liftboat growth potential. Pacific Radiance’s competitive cost structure and assets should help it emerge a winner from OSV consolidation. PACC Offshore may still outperform if it resolves Mexican hiccups and secure a charter for its second SSAV.

Avoid Keppel and Sembcorp Marine as capex-sensitive shipyards are late cyclicals and would still face rig oversupply even if oil rallies. Swiber, Vard and Cosco are either highly-leveraged and/or face operational and execution challenges. There is no rush to buy the others for lack of near-term catalysts. Upside risk will come from a broad-based valuation expansion that outpaces EPS deterioration. (Read Report)

Source : Maybank Kim Eng Research

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