atans1

Offshore & Marine: Calls, dogs and TLCs/ Whither oil?

In Energy on 03/12/2014 at 2:52 pm

Below is a piece from a broker on smaller cap O&M plays.. My view is don’t play, play. Buy two of Temasek’s Fab 5 and ride the upswing and sleep peacefully if oil prices remain low for a long time.

according to data compiled by Bloomberg. Sembcorp Marine Ltd. (SMM), the world’s second-biggest oil-rig maker, is down 29 percent this year, the index’s worst-performing stock.

Keppel Corp. Ltd. (KEP), which earned 69 percent of its revenues from the offshore and marine sectors in the quarter through September, is down 20 percent, the third-worst performer.

Many of the stocks in report posted by a friend on Facebook cannot survive prolonged period of oil at present levels.

OFFSHORE & MARINE (OVERWEIGHT)

OSK Report

Could Yesterday Be Capitulation?

Singapore oil and gas (O&G) stocks dropped 5-16% yesterday when Brent crude
fell 2% intra-day to USD67.50/bbl. A capitulation? We see at worst a 10-15%
short-term oil price downside from here before bumping up against marginal
deepwater costs, which form the oil price floor from a fundamental
perspective. The market’s fear is palpable, creating a positive environment
for mid-term returns for investors who can ride out the volatility.

What’s the downside? Today, global oil production stands at c.92m
barrels/day, c.70% onshore, c.20% shallow water and c.10% deepwater. Oil
demand is still growing 1.5% annually, while US shale supply has exceeded
forecasts. To maintain this production level to meet demand, deepwater
sources with marginal costs at USD40-80/barrel (bbl) must remain
profitable. Using the range’s mid-point, prices could go 10-15% lower in
the short term before a physical supply crunch. Oil traders know this and
will likely not extend shorts beyond USD60/bbl.

The oil market is heavily-speculated, too. Investors tend to forget that
the oil market is a human one too, prone to overreaction to peaks and lows.
Oil-related stocks now appear to be swinging in response to oil traders’
moves, which completely ignore company fundamentals.

What is made can be unmade. Cheerful media articles are now talking about
oil going to the USD36/bbl range (financial crisis low) or the USD12/bbl
range (in the 1980s when Saudi Arabia last defended market share). They
ignore the fact that the financial crisis low was caused by a global credit
crunch, forcing traders to take liquidity out from any source. The 1980s
environment was that of a global recession when oil demand fell 10%
cumulatively and when 90% of the oil was produced onshore. Such conditions
do not exist today. The recent price fall was more or less engineered by
the Organisation of the Petroleum Exporting Countries’ (OPEC) decision to
maintain production, which takes a simple production cut to undo.

Our Top Picks at USD70/bbl oil. Oil prices at this level will hit
ultra-deepwater hard, but shallow-water fields (at USD25-50/bbl) remain
strongly profitable and production-related work are unlikely to be
significantly affected. We continue to like selected Singapore O&G stocks
that entered this correction with starting valuations already low, which
have since become 35% lower. Our Top Picks are Giken Sakata (GSS SP, BUY,
TP: SGD0.65), Ezion (EZI SP, BUY, TP: SGD2.65), Nam Cheong (NCL SP, BUY,
TP: SGD0.61), Pacific Radiance (PACRA SP, BUY, TP: SGD1.55) and Marco Polo
Marine (MPM SP, BUY, TP: SGD0.60). They have strong 12-month earnings
growth and low valuations, unique industry positions and a focus on
shallow-water operations that can lead to a strong re-rating when the
market stabilises. We are negative on Vard (VARD SP, SELL, TP: SGD0.57) and
PACC Offshore Services (POSH SP, NR) for their deepwater exposure.

And watch out.

Swiber and Ezra Holdings Ltd. are scheduled to repay S$720 million ($552 million) of notes within the next two years, or three-quarters of the borrowers’ market value, after funding expansion.

http://www.bloomberg.com/news/2014-11-27/singapore-wealthy-stung-as-crude-rout-sinks-bonds-asean-credit.html

Swiber, with a market value of about $150 million, has raised the equivalent of $289 million in four bond sales this year, three in Singapore dollars and one in offshore yuan. The October 2016 notes issued at par in April traded at 92.99 cents Nov. 27, while the June 2016 bonds sold in May were at 94.65.

Swiber had negative operating cash flow of $5.3 million in the quarter through September, according to its latest results, and total bonds and loans climbed to $1.23 billion at Sept. 30 from $837.7 million at the end of 2013.

“The company is aware of current market concerns surrounding the oilfield services sector as a result of the recent weakness in oil prices,” a Swiber spokesman said in an e-mailed statement. “Swiber has developed good longstanding and supportive relationships with its banks, and is confident of its ability to meet existing debt obligations when these come due.”

Ezra Holdings’ total liabilities were $2.2 billion at the end of August, a 22 percent leap from a year earlier. Its 2016 bonds issued in March dropped more than two cents in as many months, Bloomberg compiled prices show.

Oil’s correction should be temporary as a lack of substitutes will ensure strong demand, said Eugene Cheng Chee Mun, chief financial officer of Ezra Holdings.

“We are proactively looking at refinancing options,” said Cheng Chee Mun. The company is at the peak of the capital expenditure cycle and should start increasing free cash flow next year and hence start to deleverage, he said.

Backgrounder from NYT’s DealBook dated Monday

Oil prices have come under pressure as global output of crude oil exceeded demand this year. In particular, domestic oil production has soared more 70 percent over the last six years, to roughly nine million barrels a day. The country is still a net importer, but with production growing by more than a million barrels a day every year, it is importing less and less almost every month. Imports from OPEC producers have been cut by more than a half in recent years, forcing increasing competition among Saudi Arabia and other exporting countries seeking to replace the American market with Chinese and other Asian markets. The tumbling price in oil has produced economic hardship and potential political problems for OPEC producers like Venezuela and Iran.

How low can oil prices go? Tony Roth, chief investment officer at Wilmington Trust, told Reuters, “Crude seems to have no floor right now, and we could easily see the price drop into the low $60s.” Ed Morse, global head of commodities research at Citigroup, told The Wall Street Journal, “There’s lower prices ahead.” On Monday morning, benchmark futures in New York and London slumped as much as 3.7 percent, before making up some of those losses. “It’s clear that a production war is on and it will be survival of the fittest,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said in an email to Bloomberg News.

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