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MBKE: 3 O&M Picks Amidst A Oil Price Glut
Aspire, Hot Picks | 18 March 2015
By: Lim Si Jie
Articles (169) Profile

Companies from the Offshore and Marine (O&M) sector announced results for 4Q14 and it was disappointing. Only three out of 11 O&M stocks managed to meet forecasted expectations. According to Maybank Kim Eng (MBKE), “business could get worse in 1H15” to make the situation more dire than it already is.

Recent Rebound Unconvincing

Source: FactSet

Despite the recent increase in oil prices, the share prices of the O&M sector did not recover as much. MBKE believes that the market is still not convinced of its sustainability because “oil production has not been curtailed.” Similarly, the oil price increase has not been effective in changing oil exporters’ decisions on CAPEX cuts.

Weakness In Both CAPEX And OPEX

In view of oil exporters cutting costs, service companies are bracing themselves for price cuts of five to 30 percent for existing contracts. Existing customers are also hesitating to commit because oil exporters have communicated that they will be focusing on well productivity over pricing. Surprisingly though, some oil exporters are even cutting OPEX-related jobs such as subsea IRM (Inspection, Repair, and Maintenance) work.

Maybank’s O&M Buy Picks

Although MBKE’s outlook for the O&M sector is underweight, MBKE is confident about three stocks having competitive advantages and strong balance sheets over their peers. This could potentially be an opportunity for them to emerge stronger from this downturn.

1. Ezion: Top Pick For Its Resilience

Ezion faces inherent risks of clients possibly delaying the deployment of vessels such as service rigs, lower-than-expected renewal rates and possible cancellation of contracts.

However, its earnings continue to be the most resilient among O&M stocks. Ezion is also garnering strong demand for liftboats as its clients are focusing on improving extraction of existing wells while its FY15 renewal rates are also expected to maintain.

Verdict: BUY, TP $1.83

2. Pacific Radiance: Experienced Management At Helm

4Q14 results was disappointing as its subsea sector’s performance was weaker than expected with only one DSV (Diving Support Vessel) working for a mere month. Moving forward beyond FY15, the subsea sector remains inefficient and unproductive. On top of that, weaker-than-expected charter rates and utilisation could make the recovery through the downturn much tougher.

However, Pacific Radiance has an experienced management to navigate them through this downturn. Its balanced fleet and lower asset costs will help them to tide over the rough FY 15. 4Q14 results also showed that offshore support vessels managed to hold up even though MBKE is still expecting a “five to ten percent pricing pressure in FY15.”

Verdict: BUY, TP $1.02

3. PACC Offshore: Pressure On Rates Will Subside

According to 4Q14 results, a few risks and weaknesses can be pointed out. There were lower rates and utilisation across the board. PACC’s Mexico JV continues to bleed while its second SSAV (Semi-Submersible Accommodation Vessel) remained idle. If PACC continues to post weaker-than-expected charter rates and utilisation, PACC might find it difficult to survive the downturn. Furthermore, if the losses are not recovered by FY16 and a contract for the second SSAV is not secured, the situation will be worse.

However, pressure on charter rates and utilisation will likely be for the short-term and its strong and experienced management will guide them through this period. According to MBKE, contracting of the second SSAV and Mexico JV’s return to profitability can swing FY15 earnings into the positive region.

Verdict: BUY, TP $0.65

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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