Offshore drilling activities will continue to surge in 2013: Maybank

Deepwater segment will be especially active.

Here's more from Maybank Kim Eng:

A year of bountiful offshore contract wins. 2012 was a year of bumper contract wins for offshore & marine (O&M) players exposed to the offshore oil and gas sector. The rigbuilders, Keppel Corp and Sembcorp Marine, carried over their sturdy contract win momentum from the preceding year. A key highlight in 2012 was the award of the much awaited Petrobras-related contracts to both Keppel and SMM, in which the duo respectively secured SGD6.3b and SGD7.9b in order wins. The rigbuilders went on to end 2012 with record contact wins and orderbooks.

Orders flow down to small-mid-cap players. Small and mid-cap O&M stocks in the offshore oil and gas services business also benefited as order flows down the value chain. Both Ezion Holdings and Swiber Holdings reaped in record order wins in 2012. 

Shipbuilding orders came to a crawl. Comparatively, the shipbuilders, Cosco Corp and Yangzijiang Shipbuilding faced a more dire order win environment. Shipbuilding prices hit rock bottom and new orders came to a crawl, given the supply glut and weak shipping outlook. Shipbuilders struggle to secure contracts, taking on orders with low profitability to stay afloat, awaiting a turnaround. With depleted orderbooks and persistently weak shipbuilding outlook, shipbuilders would enter into a more difficult year in 2013.

Oil price at healthy levels to sustain E&P investments. Brent crude, which we expect to stay above the USD100/bbl level, is healthy to sustain oil and gas exploration and production (E&P) spending. Industry forecasts expect global E&P spending to rise by about 7-10% in 2013, a fourth year of consecutive growth. Areas of prolific offshore activities include regions such as deepwater US Gulf of Mexico (recovering from post Macondo), offshore Brazil (to fulfill Petrobras’s production target), West Africa (especially in Angola), India, China and Australia. The Arctic is also a region that is gaining increasing vitality as technological advancements led to more discoveries which are economically exploitable.

Robust offshore drilling activities to carry on into 2013. Offshore drilling would continue to be marked by high levels of activities in 2013, especially in deepwater segment. After a temporary slowdown due to the GFC in 2009, which led to lower oil prices and demand, offshore E&P activities have rebounded as many IOCs and NOCs seek to replenish exploited reserves.

Supported by International drillers’ outlook and positive rig data. Continued exploration success and production activities would support the demand for deepwater floaters and premium jackups. Rig utilisation and dayrates for deepwater operations are seen to be strengthening and newbuild rigs are readily absorbed into the market without a significant effect on utilisation or day rates. Ensco noted that there could even be a possibility for a slight undersupply situation in 2013. Transocean remarked that rig utilisation and day rates have reached levels not experienced since 2009, while Noble Corp said that a record year of discoveries in ultra deepwater, expanding geographical reach, greater offshore access and field development project backlog are leading to higher demand, longer contract durations and prospects for higher day rates.

Offshore players would continue to secure orders in 2013. We expect a healthy stream of contracts in 2013 for players exposed to offshore oil and gas. For the rigbuilders, order wins in 2013 would naturally be lower due to the huge Petrobras-related contract in 2012. However, an expectation of USD5.4-5.5b in order win each for 2013 still considered high when compared against historical years. The offshore services players would also benefit from increased offshore construction, pipe-laying, production, inspection, repair and maintenance activities in the offshore oil fields.

Issues weighing down on the sector. As the offshore players build record orderbook levels, focus has now shifted towards execution and margins. Concerns on margin pressures weigh down on stock price performances towards the end of 2012 as 3Q12 results disappointed and managements turn conservative on forward guidance. Negative concerns easing. However, we believe that some of the negative concerns have eased, and following some battering in share prices and cuts in estimates, there are chances for positive surprises in 2013, especially in rigbuilders’ operating margins.