Home » , , , » Offshore and Marine - Green Shoots Accelerate

Offshore and Marine - Green Shoots Accelerate

Shared By Stock Fanatic on Monday, March 26, 2018 | 26.3.18

Potential FPSO awards, semisub order recovery, execution of old orders after years of delay, asset sale upside, brisker hiring, and stabilizing rentals all point to acceleration in offshore recovery. Earnings inflect in 2019; equities should outperform a year earlier. Upgrade SMM to OW.

All boats to float with order book: SMM has corrected ~25% from its YTD high on 5 Feb 2018 (the STI is flat over that period) after reporting an EBITDA loss for the first time in 15 years last quarter with cautious management outlook. With earnings, order book, and margins hitting cycle lows, we believe most negatives are now well flagged. However, the inflection from new orders and sale of nearly complete assets (20% of book) will be key to the equity story. Stocks tend to outperform 12 months before order book growth (as seen in earlier cycles, Exhibit 2), which we expect in 2019.

Confidence in positive FCF generation and profitability will drive equity performance. Hence, despite projected losses in 2018, we upgrade SMM to OW as the most levered play on the broadening offshore upcycle. We also raise our price target for Keppel to incorporate our higher order book forecasts.

Order book recovery gets more pronounced: We raise estimates on the offshore order book 15%, to ~US$15bn, with Singapore yards winning ~20% market share. Oil majors '2018 capex outlook is mostly flattish, but the ~2x inflection in FCF and 25% rise in new projects are early signs of capex growth.

Five points sum up the green shoot acceleration (see Exhibit 11):
1) BP (oil major) is starting up six major projects and making final decisions on new projects;

2) SBM Offshore saw higher probability of the bull case getting real for demand of floating production units;

3) Transocean (operator) feels strongly that harshwater rigs will be an early beneficiary of the offshore recovery, which is in the early stages.

4) Golar has confidence in floating LNG as work begins in Keppel's shipyard (after about a four-year delay).

5) Petrobras is honoring use of four rigs from contractors, after four years of challenges.

An interesting divergence (similar to spot oil price and forward curve) is in management commentary of oil producers, asset operators, and contractors – they are more constructive, while yards are more cautious.

Inflection in confirmed orders in 2018: After three years or dwindling new orders, we expect Singapore yards to get US$3bn in new orders (i.e.,about half way to mid-cycle) from floating production units and the gas value chain as they raise market share – a trend we saw more pronounced YTD.

Isn't the recovery priced in? Only partly: We see Singapore yards recovering to 18-20% midcycle ROE by 2021 as utilization rates rise with order book and asset sales (as asset rentals rise) help reduce current drag on returns. (Read Report)

Source : Morgan Stanley Research

Posted on Monday, March 26, 2018 | 26.3.18
With No comments

Join Me On: Facebook | Twitter | Google Plus ::: Thank you for visiting ! :::
Share this article :

Post a Comment

Modified by : Stockfanatic
Copyright © 2008 - 2018. Singapore Stock Market News - All Rights Reserved
Template Created by Creating Website Published by Mas Template
Proudly powered by Blogger
Related Posts with Thumbnails