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MARKET NEWS

US stocks were mixed after the close on Friday, as gains in the energy, communication services and financials sectors led shares higher while losses in real estate, health and utilities sectors led shares lower. At the close of the NYSE, the DJIA rose 0.10% while the S&P 500 index was up 0.15%, and the NASDAQ Composite index fell 0.03%. Falling stocks outnumbered advancing ones on the NYSE by 1,927 to 1,349 and 137 ended unchanged; on the Nasdaq Stock Exchange, 2,545 declined and 1,817 advanced, while 205 ended unchanged. (Source: WSJ, CNBC)

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During the last trading session, the FSSTI index slid 15.09pt to 3,061.35. Among the top active stocks were Singapore Telecommunications (+0.8%), Yangzijiang Shipbuilding (+1.4%), SPH (-1.0%), Jiutian Chemical (-1.3%) and Olam International (+1.2%). The FTSE ST Mid Cap index was down 0.04% while the FTSE ST Small Cap Index fell 0.38%. The broader market saw 184 gainers and 285 losers with total trading value of S$1.30b.

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WHAT’S IN THE PACK

Singapore Sector Update:

Offshore Marine – Daylight in sight – Industry metrics appear to have troughed. Upgrading sector view to OVERWEIGHT.

With competitive utilisation of offshore rigs approaching pre-pandemic levels and industry activity expected to pick up in 2022, we upgrade our sector weighting to OVERWEIGHT. We believe that current long-term oil prices that are around the US$60/bbl levels are supportive of higher industry capex, and nearer term we could see US$100/bbl. Our top picks are Yangzijiang, Keppel and Sembcorp Marine…

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First Resources (FR SP) – Trading BUY

Last Friday, price broke out from a pennant pattern, which is one of the continuation patterns. Both conversion and base lines are moving higher, suggesting potential upside ahead…

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Riverstone Holdings (RSTON SP) – Trading BUY

Price could have formed a base low at S$0.875. A bullish engulfing candlestick pattern was formed during the last trading session. The Stochastic is at the oversold region as well…

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Offshore Marine – Singapore

Daylight in Sight – Industry Metrics Appear to Have Troughed

With competitive utilisation of offshore rigs approaching pre-pandemic levels and industry activity expected to pick up in 2022, we upgrade our sector weighting to OVERWEIGHT. We believe that current long-term oil prices that are around the US$60/bbl levels are supportive of higher industry capex, and nearer term we could see US$100/bbl. Our top picks are Yangzijiang, Keppel and Sembcorp Marine.

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WHAT’S NEW

• Offshore utilisation and dayrates still a mixed bag. Competitive utilisation for offshore rigs have risen strongly ytd (see chart on RHS) with the number of active rigs having risen to pre-COVID-19 levels. However, the better utilisation and dayrate numbers have been confined to jack-ups and mid-water semi subs (5,000-8,000’) while deepwater semis and drillships have seen weak dayrates in particular. We also note that particular regions like Brazil have seen utilisation rates exceed 90% in 2021.

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• Industry activity to pick up in 2022. Looking at future projects, the demand for production assets appears to have meaningful upside in the next few years which could have positive ramifications for both Keppel Corp (KEP) and Sembcorp Marine (SMM). According to Rystad Energy, up to US$70b of offshore oil projects could be sanctioned by 2023 with another US$50b of offshore gas projects sanctioned by 2024 (see chart on RHS).

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• US$100/bbl oil price not out of the question. In 2020, the major oil producing countries saw staffing levels decline by between 7% to 26% while capex estimates for the upstream industry have been slashed by a combined US$285b over the 2020-21 period. The lack of human resources, coupled with lower industry capex, could curtail oil supply in the face of demand recovery in 2022-25, making it likely to see an oil price of US$100/bbl in the medium term. In the past six months, the forward Brent oil price for 2025 delivery has risen from US$54/bbl to US$60/bbl and is thus more supportive of oil industry capex. However, we have not seen oil companies respond yet. With higher free cash flow generation in 2021, we expect industry capex to pick up going forward.

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ACTION

• Upgrade sector view to OVERWEIGHT. Should activity in the oil and gas industry strengthen, leading to a revival in the offshore marine industry, we could see a cyclical upturn begin in the next 6-12 months. This assumes that the current wave of COVID-19 infections globally is dealt with in a reasonably quick manner and that governments are able treat the virus as an endemic.

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• Our top picks in the sector have not changed: a) Yangzijiang (YZJ) should see margin expansion from 2H21 onwards and also potentially list its debt investments business; and b) Keppel Corp (KEP) due to its undemanding valuations and potential positive news flow regarding the merger of its O&M business unit. In addition, we believe that Sembcorp Marine’s (SMM) risk-reward appears skewed to the upside post its recent successful S$1.5b rights issue.