Offshore & Marine - Reflections of an (ex)-O&M analyst


■ 2015 left an indelible mark for the O&M sell-side analysts. Disappointingly, the idea of ‘defensive’ cyclical was shattered.

■ To play the cycle recovery, we would lean towards vessel owners vs. yards.

EIA forecasts Brent to average US$56/bbl in 2016 vs. US$58/bbl in 2015. We expect the supply glut of 2mmbd to persist.

■ The transition to a low-carbon economy further complicates the outlook for energy prices in the medium term. Maintain sector Underweight.

2015 left an indelible mark for the O&M sell-side analysts
2015 left an indelible mark for the O&M sell-side analysts. After sailing past GFC and the 2012 euro crisis with relative ease, we dare say that most corporates were caught unawares by tumbling oil prices.

The idea of ‘defensive’ cyclicals was shattered
Disappointingly, the blood-letting across the entire industry has shattered the idea of oil service companies being relatively insulated. Shallow-water activities (lower breakeven price vs. deep-water production) plus National Oil Companies-contract coverage (which were supposedly less profit-driven than Big Oil) meant that OSV owners were more resilient.

Forecast bias is higher among vessel owners vs. yards
We have become cognisant that the upward bias is higher for vessel owners vs. yards. We found it easier to predict the performance of yards, as order wins are the key earnings driver. There are more moving parts when it comes to vessel owners. On the flipside, to play the cycle recovery, we would lean towards the vessel owners as any uptick would immediately translate into improved utilisation and charter rates.

Where would the oil price be in 2016?
2014 was the year in which the bubble burst. Brent averaged US$58/bbl and WTI averaged US$49/bbl in 2015. EIA forecasts Brent to average US$56/bbl in 2016. Our view of oil prices trading tightly within the US$50-70/bbl range for the next 3-5 years remains. On the back of falling non-Opec supply and on-trend demand growth (>1mmbd p.a.), we feel that oil prices should be slightly stronger in 2016. Undeniably, the swell of inventory build-out could weigh on oil prices.

Where do we go from here?
The transition to a low-carbon economy further complicates the outlook for energy prices in the medium term. However, we recognise that the current energy system needs to evolve as well. Even with disruptive innovation and less reliance on fossil fuels, we believe that oil prices could see brighter days in 2020-25, as the purple patch which US shale is enjoying fades, and as the effects of reduced investments come into play. (Read Report)

Source : CIMB Research

Labels: ,