Relooking at the laggards of the oil cycle
By DMG Research
The offshore support vessel (OSV) sector is a late-cycle beneficiary in an upturn of the offshore oil and gas industry. We believe higher oil demand may mark the start of another secular growth. We view the firmness in the OSV’s share prices following recent placement exercises with optimism.
Additional capital could fund M&A activities, distressed asset purchases, and/or provide for a larger capital base for financial leverage, if necessary. We do not see an oversupply situation, as not all speculative OSVs newbuilds will come into fruition and the current down climate may force out older tonnage.
The recent placement exercises for Singapore OSV players may have diluted the companies' existing share bases, but we recognise that the additional cash inflow would strengthen the companies' financials. Hence, this gives Ezra the financial flexibility to expand its fleet or consider M&A to increase market share and Swiber, a stronger equity base for future financial leverage.
A low cost or deflationary environment would encourage more drilling and mark the start of another secular growth cycle. Given that 2.6 OSVs are required to assist every drilling rig with the possibility of the ratio trending higher as drilling becomes more sophisticated and complex, we believe there will be a constant demand for OSVs, going forward.
We expect the current downturn to force out older tonnage, bringing into equilibrium the overall supply vessel market and creating an undersupplied deepwater segment over the next few years. Approximately 50% of the industry's vessels are beyond their expected useful lives.
In terms of risks, earnings over the next 12 months are expected to come under intense pressures due to lagged effects from exploration & Production (E&P) capital expenditure cuts, and supply glut concerns. These factors, while could weigh on the stock during this transition period, are not new issues. Both Ezra and Swiber have already fallen by 54% and 66% from a year ago.
Going forward, we believe that the share prices will be driven less by near-term quarterly earnings results and more by how the companies are positioned through this transition period to benefit when the up O&M cycle returns. We are adjusting up our valuation parameter to 12x (in line with historical average of 12-15x P/E) to reflect the investors’ higher risk-reward appetite for the offshore marine players. Our top pick for the smaller cap oil and gas services sector is Ezra. We have upgraded Ezra from NEUTRAL to BUY (TP: S$1.51) and Swiber from SELL to NEUTRAL (S$0.85).
Disclaimer
This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report.
|
