Onwards And Upwards
The rig market appears to have turned a corner in 2021 with oil prices exceeding US$80/bbl – this has resulted in stronger rig utilisation rates and a firming of rig day rates vs 2020. The higher offshore activity expected in 2022 and 2023 underpins our positive view on the sector, especially given that meaningful rig supply was removed globally. We retain our OVERWEIGHT view on the sector, and our top picks remain Yangzijiang, Keppel Corp and Sembcorp Marine.
WHAT’S NEW
• Offshore utilisation now exceeding pre-COVID-19 highs. Competitive utilisation for offshore rigs rose strongly in 2021 (see chart on RHS) and now exceed pre-COVID-19 levels. With the higher utilisation numbers, we believe that dayrate numbers should follow and incentivise rig owners to place new orders. Already we have seen firmer rig dayrates on a yoy basis. We also note that particular regions like Brazil saw utilisation rates exceed 90% in 2021.
• Global offshore activity expected to pick up in 2022 and 2023. 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, offshore investments in 2022 are set to increase by 7% yoy from US$145b to US$155b (see chart on the right). In addition, we highlight that the US$150b of greenfield projects sanctioned in 2021 (2020: US$80b) will likely be repeated in 2022, thus underlining the positive outlook for the offshore marine
sector in the short to medium term.
• Supply destruction continues. Comparing Jan 22 data vs Jan 21, we note that the global offshore rig count fell 7% yoy to 716 rigs. According to industry data, 42 rigs were sold for scrap or conversion, with semi-subs registering the largest supply destruction in percentage terms, down 12% yoy to 104 rigs. In our view, this is positive for the industry as the extraction of excess supply should allow utilisation and dayrates to firm up going forward.
ACTION
• Maintain sector view at OVERWEIGHT. Should activity in the oil & gas industry strengthen in 2022 and 2023 (thus lead to a revival in the offshore marine industry), we could see a cyclical upturn start in the near term. This assumes that variants of COVID-19 are less lethal, and that governments are able to view the virus as endemic.
• Our top picks in the sector are: a) Yangzijiang (YZJ) which remains inexpensive at 2022F P/B of 0.6x and will see margin expansion in the next few quarters; and b) KEP due to its undemanding valuations and potential positive newsflow regarding the merger or divestment of its O&M business unit. In addition, SMM’s risk-reward appears skewed to the upside post its successful S$1.5b rights issue in 2021, and it should also benefit from the coming upcycle as Singapore’s largest offshore marine company.
• Lower oil demand in 2021, but higher in 2022. In its latest Jan 22 update, the US Energy Information Administration (EIA) lowered its forecast oil demand growth for 2021 by 0.6mmbpd (vs its Sep 21 forecast) while raising its demand expectations for 2022 by the same amount to account for the negative impact from the proliferation of the Delta variant in 2021. Nevertheless, it appears that OPEC+ has a firm control of the global oil market, and thus oil prices should remain well supported above the US$75-80/bbl range in the near to medium term. We also point out that consensus is increasingly talking about an oil price well in excess of US$100/bbl, which is something we had mentioned in Mar 21.
RISKS TO OUR THESIS
• Prolonged global economic recovery should new COVID-19 variants arise.
• Lack of financing for industries that are seen to be related to the fossil fuel industry.
• Oil companies may remain wary of committing to offshore capex and instead channel free cash flow towards paying dividends.