ed-JS / sa- AS Down but not out Low oil prices are here to stay; OPEC’s stance remains a wild card M&A activities tipped to pick up; privatisation / takeover candidates – Baker Tech, POSH, Mermaid, Rig Tenders, MMHE Buy refineries – PTTGC and BCP as near-term plays for low oil price Accumulate SCI, Ezion and SapuraKencana on dips Unfruitful Doha talks raise near-term volatility. We expect oil prices to average between US$35-40/bbl in 2016 (vs US$53.6/bbl in 2015). In the near term, oil prices could stay volatile and weaken further on the back of refinery maintenance and sentiment-hit from collapse of output freeze talk in Doha. The weak demand data, potential Fed rate hikes translating into stronger USD, and speculative pressures, could suppress oil prices before recovering somewhat towards the end of the year. We expect a gradual recovery to US$40- 45/bbl in 2017 and US$55-60/bbl thereafter as production cuts filter through. OPEC’s production stance and production disruption remain wild cards. Lower-for-longer oil prices set the stage for M&A activities. The sector’s prolonged oil crisis and depressed valuations could catalyse more M&A activity, which had stalled last year due to price impasse. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. We also expect to see a wider consolidation scale in the O&G industry as the players face further financial pain. We identified several potential takeover / privatisation candidates in South East Asia – Baker Tech, Mermaid, POSH, Rig Tenders and MMHE. Selective BUYs on dips. We have cautioned in mid-Mar that the two-week sharp rallies in oil price and O&G-related stocks could be short-lived in the absence of sustainable fundamental improvement, in our sector reports: “Singapore rigbuilders: Looming credit risks” and “Oil and Gas: Sinking further”. Time to bottom-fish after the knee-jerk correction post-Doha talks? Near-term plays would be Thai refineries - PTTGC and BCP – which should benefit from low oil prices. Investors with longer investment horizons might look to accumulate solid O&G names - SCI deserves a re-rating for its undervalued utility business at 7x PE and 0.7x P/BV; Ezion remains the best proxy to ride any oil price rebound and a near-term catalyst could stem from its successful foray into the Chinese windfarm market; SapuraKencana has a strategic business position which is stretched across the O&G value chain. Analyst Janice Chua +65 6682 3692; [email protected]Pei Hwa Ho +65 6682 3714; [email protected]Suvro SARKAR +65 6682 3720; [email protected]Chaipat Thanawattano +66 2657 7827; [email protected]William Simadiputra +62 2130034939; [email protected]Malaysian Research Team +603 2604 3333; [email protected]Singapore Research Team; [email protected]STOCKS Source: DBS Bank, DBS Vickers, AllianceDBS DBS Group Research . Equity 20 Apr 2016 Regional Industry Focus Oil and Gas Refer to important disclosures at the end of this report Price Mkt Cap Target Price Performance (%) LCY US$m LCY 3 mth 12 mth Rating Singapore S$ S$ Keppel Corp Ltd 6.07 8,154 5.25 25.7 -34.4 Hold Sembcorp Marine 1.82 2,807 1.24 22.2 -41.1 FV Sembcorp Industries 3.10 4,095 3.30 34.8 -34.7 Buy Yangzijiang 1.01 2,864 1.25 9.8 -28.6 Buy COSCO Corp 0.35 580 0.24 7.7 -38.1 FV Ezion Holdings 0.545 643 0.85 10.1 -55.7 Buy Ezra Holdings 0.104 226 0.11 79.3 -63.4 Hold Mermaid Maritime 0.118 123 0.09 -8.5 -54.6 FV Nam Cheong 0.098 152 0.07 -1.0 -71.2 FV Pacific Radiance 0.335 177 0.25 15.5 -54.1 FV Pacc Offshore 0.375 503 0.28 31.6 -26.5 Hold Vard Holdings 0.187 163 0.13 11.3 -67.5 FV Malaysia RM RM Bumi Armada Bd 0.72 1,083 0.90 -24.2 -39.5 Hold Coastal Contracts 1.63 222 1.65 8.7 -45.3 Hold Dayang Enterprise 1.29 290 1.10 26.5 -49.6 FV Dialog Group 1.59 2,132 1.50 3.2 -4.2 Hold Malaysia Marine 1.26 517 0.90 40.0 -1.6 FV Perisai Petroleum 0.26 80 0.35 4.1 -56.0 Sell SapuraKencana 1.79 2,750 2.10 10.5 -33.5 Buy UMW Oil & Gas 0.94 514 0.65 3.9 -59.9 FV Deleum Bhd 1.20 122 1.25 25.7 -30.2 Buy Pantech 0.58 90 0.70 5.5 -21.9 Buy Thailand Bt Bt Bangchak 31.00 1,221 39.00 -0.8 -10.8 Buy IRPC PCL 5.25 3,069 4.30 19.3 12.2 Hold PTT PCL 298.00 24,349 320.00 49.0 -15.3 Buy PTT Exploration 71.50 8,120 62.00 66.3 -40.4 FV PTT Global 61.00 7,783 70.00 29.8 -1.6 Buy Thai Oil PCL 68.50 3,998 54.00 5.8 20.2 FV Indonesia Rp Rp Elnusa Tbk PT 407 234 205 131.1 -28.3 FV Medco Energi 1,350 349 820 95.7 -56.1 Hold Logindo 139 27 132 20.9 -73.8 Hold Wintermar Offshore 175 54 206 28.7 -67.6 Hold Page 1
Transcript
ed-JS / sa- AS
Down but not out Low oil prices are here to stay; OPEC’s stance
Buy refineries – PTTGC and BCP as near-term plays for low oil price
Accumulate SCI, Ezion and SapuraKencana on dips
Unfruitful Doha talks raise near-term volatility. We expect oil prices to average between US$35-40/bbl in 2016 (vs US$53.6/bbl in 2015). In the near term, oil prices could stay volatile and weaken further on the back of refinery maintenance and sentiment-hit from collapse of output freeze talk in Doha. The weak demand data, potential Fed rate hikes translating into stronger USD, and speculative pressures, could suppress oil prices before recovering somewhat towards the end of the year. We expect a gradual recovery to US$40-45/bbl in 2017 and US$55-60/bbl thereafter as production cuts filter through. OPEC’s production stance and production disruption remain wild cards. Lower-for-longer oil prices set the stage for M&A
activities. The sector’s prolonged oil crisis and depressed valuations could catalyse more M&A activity, which had stalled last year due to price impasse. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. We also expect to see a wider consolidation scale in the O&G industry as the players face further financial pain. We identified several potential takeover / privatisation candidates in South East Asia – Baker Tech, Mermaid, POSH, Rig Tenders and MMHE. Selective BUYs on dips. We have cautioned in mid-Mar that the two-week sharp rallies in oil price and O&G-related stocks could be short-lived in the absence of sustainable fundamental improvement, in our sector reports: “Singapore rigbuilders: Looming credit risks” and “Oil and Gas: Sinking further”. Time to bottom-fish after the knee-jerk correction post-Doha talks? Near-term plays would be Thai refineries - PTTGC and BCP – which should benefit from low oil prices. Investors with longer investment horizons might look to accumulate solid O&G names - SCI deserves a re-rating for its undervalued utility business at 7x PE and 0.7x P/BV; Ezion remains the best proxy to ride any oil price rebound and a near-term catalyst could stem from its successful foray into the Chinese windfarm market; SapuraKencana has a strategic business position which is stretched across the O&G value chain.
Key drilling contractors – Unprofitably low dayrates and utilisation 12
Rigbuilding – supply glut takes time to ease 13
Offshore Support Vessels – the survival game 14
M&A ACTIVITIES: Set to spike 15
VALUATION: Is it time to bottom-fish? 19
Company Guides
Ezion Holdings 22
Mermaid Maritime 28
PACC Offshore Services Holdings 34
Sembcorp Industries 41
Bangchak Petroleum Pcl 48
PTT Global Chemical 55
SapuraKencana 62
Page 2
Industry Focus
Oil and Gas
Investment Summary
Lowered oil price forecasts. We expect oil prices to average between US$35-40/bbl in 2016 – compared to 2015’s average Brent crude oil price of US$53.6/bbl. Oil prices averaged US$36.10/bbl YTD. In the near term, we expect oil prices will stay volatile and could weaken further owing to weak demand data and speculative pressures, before recovering somewhat towards the end of the year. In 2017, we can expect a mild y-o-y recovery in oil prices with an average of US$40-45/bbl, driven by gradual convergence of oil supply-demand trends. Our longer term oil price forecast is currently around US$55-60/bbl, but we reckon there is more upside risk in the longer term than downside risk. The key change driving our lower forecast for oil price is the wider gap between supply and demand that opened up in 2015, OPEC’s negative stance, removal of Iran sanctions and possibly weaker than expected demand from China and other emerging economies. Upside risks could stem from possibility of heightened tensions in the Middle East leading to supply chain disruptions.
Source: Bloomberg Finance L.P., DBS Bank Prolonged low prices set the stage for M&As. O&G M&A deals stalled last year due to price impasse between buyers and sellers. We believe the gap is likely to close this year as oil prices have remained weak after 1.5 years. In an attempt to identify potential takeover / privatisation candidates, we found several Singapore/Malaysia/Thailand/Indonesia-listed stocks that fit these criteria: Companies with sound fundamentals and financials, i.e. in net cash or low net debt positions; having a majority shareholder also brings the privatisation angle into the picture, increasing the likelihood of M&A activity. Below is a list the of oil & gas companies in the region that we think hold a higher probability of takeover or privatisation.
Potential Takeover / Privatisation candidates
Short Name Exchange Top shareholder % owned
Net D/E P/B P/E % increase/(decline) in price since Dec 2014
Source: Bloomberg Finance L.P., Companies, DBS Bank Gloomy outlook across region. Malaysia’s Petronas is reportedly planning to slash as much as RM50bn (US$11.4bn) in capex and opex over the next four years, indicating pricing pressure and slow contract flow ahead for local players. Indonesia's oil & gas industry is expected to be hit by insignificant industry reform, delaying long-awaited tenders. Further away in Latin America, Brazil’s corruption scandal is a long-drawn issue. The outlook is slightly brighter in Mexico, with its oil industry warming up after a slow start with the successful awards of all of its 25 onshore fields auctioned at the end of 2015. There are plans for a round of auction on its deepwater fields this year. The capex and opex cut cycle continues, leading to knock-on effects on asset and service providers. Drillers saw utilisation plunging below 60% levels and is expected to remain under
pressure, adding woes to rig supply glut. This has not just affected Singapore rigbuilders' order wins but also existing orderbooks which face massive deferments. The OSV players are struggling to stay afloat with day rates nearly halved and utilisation falling below 50%, alongside the plunge in rig count. Cherry pick solid names. Near term plays are Thai refineries – PTTGC and BCP– who are beneficiaries of low oil prices. We continue to see value in SCI, which utilities remain undervalued at 7x PE and 0.7x PB. Ezion remains the best proxy to ride any oil price rebound and near term catalysts stem from its successful foray into the Chinese windfarm market. We also like SapuraKencana for its strategic business position which stretched across the O&G value chain.
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Industry Focus
Oil and Gas
Oil Prices: No escaping the new lows Prices hover around 2004 levels. Since the last OPEC meeting on Dec 4, 2015, Brent crude oil prices have been quite weak and averaged around US$35.2/bbl year to date in 2016, compared to 2015’s average Brent crude oil price of US$53.6/bbl. One of the key negative factors behind the slide has been the uncertainty on OPEC’s production stance – with Saudi Arabia stopping well short of a production cut and regional rival Iran not even agreeing to a freeze – as well as weak economic data from China in early 2016 that has spooked financial markets. Lowered our near term oil price expectations. We expect oil prices to average between US$35-40/bbl in 2016. In the near term, oil prices are likely to stay volatile and could again weaken towards US$35/bbl due to weak demand data, inventory pile up and speculative pressures, before recovering somewhat towards the end of the year. While the pace of US interest rate hikes hereon could be lower than initially projected, any subsequent USD strength will also continue to weigh on oil prices in 2016. In 2017, we can expect a mild y-o-y recovery in oil prices to an average of US$40-45/bbl, driven by gradual convergence of oil supply-demand trends. The key change driving our recent lower forecasts for oil price is the wider gap between supply and demand that opened up in 2015, OPEC’s negative stance,
removal of Iran sanctions and possibly weaker than expected demand from China and other emerging economies. Upside risks in the near term could stem from possibility of heightened tensions in the Middle East leading to supply chain disruptions. Longer term forecasts more sanguine. We expect oil prices to move upwards at a faster trajectory towards the end of the decade. Firstly, of course, we consider the fact that close to US$380bn of capex has been deferred since the oil price crash in late 2014 – according to industry consultant Wood Mackenzie – and further deferrals will mean that close to 3mbpd of supply that was supposed to come onstream by 2020 will now only come in the years after that. This will help the supply demand equation as we approach 2020. Also, the need to develop oil production in more expensive areas – and the cost of the most expensive last barrel needed to meet demand – will continue to support oil prices. On the cautious side, we note that technological advances have rendered extraction of oil (read: shale oil) more flexible to demand changes with shorter lead time to production, and the global focus on climate change will limit the future exploitation of fossil fuels to an extent. Our longer term oil price forecast is currently around US$55-60/bbl, but we reckon there could be more upside risk in the medium to long term than downside risk.
Oil price trends
Source: Bloomberg Finance L.P., DBS Bank
0
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Brent WTI
Brent hit a high of US$115/bbl on 19-Jun-14 before collapsing
Brent has been hovering around US$35-40/bbl levels, after hitting lows of US$27/bbl in January 2016.
DBS forecast for Brent:2016 average – US$35-40/bbl2017 average – US$40-45/bbl
Long-term price – US$55-60/bbl
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Industry Focus
Oil and Gas
In terms of supply-demand fundamentals, the picture is not very rosy in the near term. According to EIA data and our estimates, the gap between supply and demand (or in other terms, inventory build) averaged around 0.8mmbpd in 2014 and 1.8mmbpd in 2015. Global oil inventory builds are projected to average around 1.6mmbpd in the initial part of 2016, still at levels too elevated for comfort. The figure below shows the gap between supply and demand of oil in the recent past, and the big gap that has opened up represents growing inventory build-up. Global oil production and consumption trend and
forecasts
Source: EIA, DBS Bank Global oil inventories will continue to exert pressure on oil prices. The US crude oil supplies are at their highest level in more than 80 years while spare storage capacity is dwindling around the globe, which leads to fears that crude prices could fall further in the near term. Crude oil inventory in the US breached 500mmbbls as of the February 2016, equal to almost 80% of US storage capacity. In the most recent reading, US oil inventories were at levels of 530mmbbls, a historically high level for this time of the year. Overall OECD inventory levels continue to rise (from 58 days at end-2014 to about 66 days of supply currently), thus continuing to exert pressure on oil prices. OECD crude oil inventory (days of supply) trend and
forecasts
Source: EIA, DBS Bank
No spectacular spurt in demand expected. The EIA expects oil consumption to grow by 1.1mmbpd and 1.2mmbpd.in 2016 and 2017, respectively. This is slightly lower than the 1.3mmbpd demand growth seen in 2015. Oil consumption forecasts have been revised downwards in recent months as doubts over global GDP growth intensified. Slowing economic growth in China amidst economic transformation has been the key downward bias. Thus, despite the prevailing low oil prices, overall global economic conditions do not evoke expectations of a strong oil demand growth scenario. On the other hand, despite the low oil prices, global oil supply in 2015 expanded by over 2.1mmbpd – after expanding by around 2.5mmbpd in 2014 – with both OPEC and non-OPEC sources contributing almost equally to the increase. 2016 should see supply flattening out, with additional supply from OPEC sources offset by some reduction from the US and other high-cost production areas. However, there will still be a gap between supply and demand through 2016, and while it will narrow over the course of the year, the gap is unlikely to be breached until well into 2017, in our opinion. One of the key negative factors in recent weeks has been the uncertainty in OPEC’s production stance. The most recent meeting held in December 2015 did nothing to limit production targets, as expected. Worryingly, the group abandoned its official production target altogether. This kind of reaffirms OPEC’s ongoing policy – led by Saudi Arabia – to protect market share and slow down high-cost producers, a strategy that has not been very successful so far. OPEC production way above 30mmbpd. OPEC production breached the 32mmbpd mark consistently in 2H15, higher than the existing target of 30mmbpd set by member nations earlier. Iraq and Saudi Arabia have been the key drivers behind the production increase in recent months. Iran is still producing at around 2.8mmbpd, and expectations are that it can ramp up to 3.8mmbpd – levels before imposition of sanctions – over the next two years. OPEC production trends
Source: Bloomberg Finance L.P., DBS Bank
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Industry Focus
Oil and Gas
The other big uncertainty going into 2016 will be the pace of incremental supplies from Iran following the lifting of sanctions early in 2016. According to Iranian officials, Iran has secured customers for its planned supply expansion and has ambitions to add 500kbpd of exports within a week of sanction removals and 1mmbpd of exports within six months. This timeframe may not be realistic, but expect additional supply to make a mark at least from 2H16 onwards. Meanwhile, US production has relented but it’s no sharp fall off. At the start of last year, most of the market held the view that Saudi Arabia’s policy of maintaining crude production would push many of the US tight oil players out of business. However, production from US tight oil continued increasing in the initial months of 2015 and overall US production peaked out around April at 9.7mmbpd. This was despite the fall in rig counts as improving productivity more than made up for it. Since May, there has been a gradual decline in US production but production has in no way fallen off the cliff. With month-on-month declines, US production ended the year at around 9.5mmbpd. On a y-o-y basis, average production in 2015 was about still 9% higher than in 2014. 2016 should see some further decline of around 500-600kbpd from 2015 levels. Total oil production trends in the US
Source: Bloomberg Finance L.P., DBS Bank Rig counts have fallen in the US. The total number of rigs drilling for oil and natural gas in the U.S. closed the year 2015 below 700 rigs for the first time since 1999. Oil rig count stood at 536 rigs, while there are only a paltry 162 rigs drilling for natural gas, based on the Baker Hughes data. Oil field operators have pulled back two-thirds of the rigs that were operating at the peak of the U.S. oil boom in October 2014, when oil rigs totaled 1,609. But productivity has shot up. Productivity gains across the 7 main shale producing areas in the US has been relentless, as drillers have applied new, innovative technologies to increase output and reduce drilling time. As a result, new-well oil
production per rig – the benchmark for productivity – has surged 41% since Oct 2014, when rig counts began their steep decline. This is not a new phenomenon. Tight oil has boasted steady productivity gains of ~34% CAGR since 2007, as evident from the chart below. These productivity gains have more than offset the decline in drilling rigs so far. US new well production per rig
Source: EIA, DBS Bank More projects remain feasible at lower oil prices than earlier anticipated. Another factor that has enabled US tight oil players to sidestep Saudi Arabia’s attacks: breakeven oil prices that were lower than expected. This has been at least partially due to the knock-on effect of productivity gains, since breakevens are moving targets. In a report issued by Rystad Energy early this year, they found breakevens at the major US shale plays to be as low as US$42/bbl, with an average of around US$58/bbl. Notwithstanding that Rystad’s estimates assume a 10% IRR breakeven (so cash breakeven could be even lower), these levels are much more tolerable than Saudi Arabia’s US$103/bbl breakeven needed to balance its fiscal budget in 2015.
WTI breakeven levels for US shale plays
Source: Rystad Energy
42 4350 52 53 54 55 56 58 61 62 65
73 7480
0102030405060708090 WT I Breakeven for US Shale Plays (USD/bbl)
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boepd per rig
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Industry Focus
Oil and Gas
In our previous oil price reports, we have identified several key factors which will have a big impact on which way oil prices are headed. Some of these factors have turned more negative in the last few months, as a result of which we are revising
downwards our oil price forecasts. The table below lists how some of these key issues have evolved over the past few months in shaping our view of the oil price environment.
Studying the impact of the key structural issues so far
Key Issues What has happened since our last report Impact
OPEC Response No let up in steam as regards production from OPEC countries, led by Saudi Arabia. Discarded official production target at last general meeting; not a good sign as far as supply is concerned. Production has consistently been above 32mmbpd since 2H15, higher than the earlier 30mmbpd cap set by member nations. Talks with Russia in February led to a production “freeze” but Saudi has so far steered well clear of any talks of a production cut.
Profile of US shale production Shale oil production in the US has been declining gradually since April 2015 but not fast enough. US tight oil production was actually up y-o-y on average by 9% in 2015. This is despite a steep decline in the working rig count in the 7 regions comprising the bulk of tight oil production. Increased productivity per well, lower costs and price hedges ensured that production has been much more resilient than what the market (or the Saudis) were looking for. Given the relatively short lead time and fast decline rates of shale oil wells, the profile of shale production is much more flexible and can adjust to oil price movements faster than conventional oil. Thus, shale oil could be the swing producer in current scenario and limit oil price volatility.
Inventory Buildup Gap between supply and demand continued to be very wide throughout 2015. US crude inventories have reached new peak levels of 518mmbbls in recent weeks. Overall OECD inventory levels continue to rise (from 58 days at end-2014 to about 63 days of supply currently), and will thus continue to exert pressure on oil prices in future.
Structural changes in global oil demand
Lower oil prices have not resulted in any significant pickup in demand. The gap between supply and demand was more than 2.0mmbpd in 2015 and should still be around 0.5-1.0mmbpd in 2016, despite assumed production cuts in the US. A balance in demand-supply could only be achieved in 2017 and beyond, according to current estimates.
Source: DBS Bank
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Industry Focus
Oil and Gas
Studying the impact of the key structural issues so far
Key Issues What has happened since our last report Impact
Role of China in oil demand China is still expected to add around 0.3mmbpd incremental oil demand in 2015/16, but is no longer the big driver as in the past. Economic data coming out of China has not been particularly strong. The plunge in domestic stock markets and possibility of further Yuan devaluation continues to stoke fears of a hard landing for China and a collapse in demand for commodities.
US dollar strength Following the first rate hike in December, views differ on how rapid Fed funds rate (FFR) will ascend in 2016. Consensus currently sees Fed funds rate heading to 1% by end-2016, while our economist expects a faster pace, rising 25bps per calendar quarter that lifts rates to 1.5% by end-1Q17. A fast rise in US rates and corresponding strength in US dollar could be further negatives for oil price.
Geopolitical issues Intensification of the conflict in the Middle East – Syria, Iraq, and Yemen – where various parties like Saudi Arabia, Iran, Turkey, Russia and the US are playing their own proxy wars so far, could cause a sharp uplift in oil prices if oil wells and oil transfer facilities are attacked by either side in case of a direct confrontation.
Response from global oil majors Capex budgets have already been cut substantially since the onset of the oil price collapse. Capex budgets for 2016 have been slashed by an average of 25% across our sample when compared to 2014’s quantum, and further cuts have been announced for 2017 and 2018. This should gradually lead to restoration of supply-demand balance in future.
Source: DBS Bank
Page 8
Industry Focus
Oil and Gas
International Oil Majors – More capex cuts International Oil Majors’ crystal balls have turned a lot cloudier since the second half of 2015, when oil prices were trading within the US$45-55 range, and a majority of them were predicting oil price rebounds to ~US$65 by 2017/2018. Fast forward to March 2016 and almost all of the oil majors have shied away from giving explicit oil price forecasts. Those who have are not painting a rosy picture either; ENI is projecting a US$45/bbl average oil price in 2016-2017 and US$63/bbl in 2018-2019. Supermajors slashed 2016 capex budgets by 35%... Nonetheless, capex budgets have already been cut substantially since the onset of the oil price collapse. Capex budgets for 2016 have been slashed by an average of 35% across our sample when compared to 2014’s quantum, and further cuts have been announced for 2017 and 2018 (see chart below). In addition, 2016’s aggregate planned capex is ~15% lower than 2015’s numbers. This spells more pain for oil & gas service companies in the near-term, as less work is likely to be available. … as well as OPEX. Operating cost reductions in 2015 have been substantial as well. As an example, ExxonMobil, Chevron and Shell have cut US$8.5bn, US$4bn and US$4bn
in operating costs respectively in 2015 alone – or a ~10-20% reduction y-o-y. Additionally, ExxonMobil disclosed back in 3Q15 that it had enjoyed a 20-50% savings rate on offshore rig charters in the first 9 months of 2015, which is unsurprising given that we have seen OSV day rates mirror this and tumble by at least as much. Investment in deepwater not completely dried up. One interesting point to note is that not everybody is turning their backs on deepwater exploration, which entails higher costs for extraction per barrel. Shell is planning to focus on deepwater E&P post-merger with BG Group; BP plans to maintain deepwater as a piece of its portfolio. We believe this is moderately encouraging for service players in the deepwater space such as Ezra and POSH, as it signals that deepwater work will not dry up completely. On the next page, we give a brief update on the state of upstream E&P strategy across key International Oil Majors, a recap of projects that they have deferred or cancelled in light of depressed oil prices, a summary of estimated opex reductions that have been achieved so far, as well as their executive’s view on the direction of oil prices in either the near or long-term, where available.
Capex budgets: 2016E vs. 2014A – average decline of 35%
Source: Companies, DBS Bank
05
101520253035404550
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-34% -26%
-40%
-21%
-63%
-27%
-40%
-34%
*Assuming Shell and BG had merged as of 1 Jan 2014*ENI: using the average of 37bn capex over its 4-year programme (2016-2019)
(in US$m)
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Industry Focus
Oil and Gas
Summary of oil major’s strategies and recent actions
Oil Majors Recent take on oil prices E&P strategy Project deferments/cancellations OPEX
ExxonMobil N/A Aims to improve profitability through higher-margin production growth: doubling US onshore liquids production.
Pursuing only high-quality resources with stable, competitive fiscal terms. 10 projects due for start-up between 2016-2017.
N/A Achieved US$8.5bn in operating cost reductions for full-year 2015. In 3Q15, ExxonMobil disclosed that opex savings on offshore rig spending has been the largest in percentage terms, ranging from 20-50%.
Chevron N/A Focus on investments with short cycles, low subsurface risk, ratable production. Will leverage through existing facilities (e.g. infill drilling, workovers).
Deferred plans to drill in the Canadian Arctic indefinitely. Cancelled tender for a rig to drill in the Frade oilfield off Brazil, postponing development drilling
Opex reductions of approximately $4 billion on an annual full run rate basis (~16% reduction y-o-y). About half of this is coming through organisational reviews and portfolio rationalisation and about half working through the supply chain.
Shell “The oil prices we are seeing today are not sustainable and are going to settle at higher levels,” he said, “and higher, in my mind, over the next few decades than the low $60s that we require to make this deal [referring to the Shell-BG merger] a good deal.” - CEO Ben van Beurden in Jan 2016 "It is a very, very volatile business in terms of supply and demand. The oil price responds to very small mismatches between supply and demand" - CEO Ben Van Beurden in Sep 2015
Focusing on LNG and Deepwater post-merger with BG Group, while high-grading E&P portfolio, picking the most attractive options.
.
Scrapped the US$6.5bn Petrochemical plant project with Qatar Petroleum, cancelled the Carmon Creek thermal in situ project in Canada, sold its Elba LNG project in Savannah, Georgia to Kinder Morgan, and divested its 50% stake in Malaysia's MLNG Dua project. Shell has also pulled out of its Alaskan drilling programme in the Chukchi Sea, on which it had already spent US$7bn.
US$4bn in operating cost reductions in 2015, representing a 10% decline; 7,500 staff and contractor headcount reductions in 2015.
Shell-only opex should reduce by a further US$3bn in 2016.
BP “A low point could be in the first quarter [of 2016],” BP CEO Bob Dudley said in an interview in January with the BBC. “But 2016’s third and fourth quarters could witness a more natural balance between supply and demand, after which stock levels could start to wear off.” - CEO Bob Dudley in Jan 2016
Still planning to maintain a balance of deepwater, gas and giant fields, with an increasing bias towards gas.
US$10bn asset divestment plan carried out in 2014/15, with a further US$3-5bn expected in 2016, before normalising to US$2-3bn from 2017 onwards. Mad Dog II deepwater project's FID was put on hold; project cost estimates now lowered by ~50% to US$10bn.
Upstream: 10% fewer employees, 42% fewer contractors. Unit production cost ($/boe) has been reduced by ~20%. Third-party spend has reduced by 15%.
Downstream: 40% reduction in head office costs through streamlining and eliminating of activities. 2015 cash costs US$3.4bn lower than 2014.
Source: Companies, Newswires, Upstream
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Industry Focus
Oil and Gas
Summary of oil major’s strategies and recent actions
Oil Majors Recent take on oil prices E&P strategy Project deferments/cancellations OPEX
ConocoPhillips "We believe this downturn could last a while longer. Just a few months ago, we though the market would rebalance by the second half of 2016. Now it looks like that could stretch into 2017… greater concerns about global growth suggest it could take longer to reach and equilibrium mid-cycle price after balancing occurs." - Charman and CEO Ryan Lance in Feb 2016
Exiting deepwater exploration. Shifting E&P capital allocation toward a low cost of supply resource base that is flexible, allowing the company to scale up in a high-oil price environment and vice versa when prices are low: North American Unconventionals (e.g. tight oil) was highlighted as the most attractive investment type (having >25% ROI, low cost of <$60/boe, and high flexibility). Conversely it will scale back on lower return, higher cost Oil Sands, North American Gas, and LNG projects.
US$2.2bn Tommeliten Alpha gas development off Norway cancelled. Greater Mooses Tooth 1 Alaskan project deferred; cost would have been ~US$0.9bn. 50%-owned Christina Lake oil sands project in Canada has been deferred. All shale projects in China have been suspended.
Opex guidance now lowered to US$7.0bn, down from earlier estimates of US$7.7bn. 2015's operating expense was US$8.0bn.
TOTAL “We don’t anticipate a recovery in 2016...Having said that I don’t know if the price will be at 40, 45, 50, 60. In 2016 the growth of capacity will still be larger than the growth of demand. I am not very optimistic for 2016, beyond that it is difficult to know:" - Total CEO Patrick Pouyanne on 7 December 2015.
75% of capital employed per year to be allocated to upstream; 25% to downstream. LNG as one of the group's growth drivers - increasing LNG production capacity by 50% by 2020. LNG to account for 30% of operating income by 2020.
Martin Linge in the North Sea has had its start-up date deferred by over a year, to January 2018, although engineering issues played a part here. US$34bn Ichthys LNG mega-project in Australia and Tempa Rossa in Italy have reportedly had start-up dates pushed back beyond 2017.
2015 saw US$1.5bn in opex savings, mainly derived from the upstream business.
2016 opex savings targeted at US$2.4bn; 2017 opex savings targeted at US$3bn, up from US$2bn target set in 2014; almost US$2bn of the 2017 opex savings will come from the upstream business segment.
Statoil "It's difficult to predict how the price will develop in the short term. There will probably be volatility and big swings. We firmly believe prices will rise because there is little new production capacity entering the market." - Statoil CEO Eldar Saetre in Jan 2016
Consistent exploration programme in 2015, drilling in high-value basins - "investing through the cycle"
Pushed back start date for US$7bn Mariner project in the North Sea from 2H17 to 2H18. ~US$4bn Aasta-Hansteen gas field off Norway start-up also delayed from 2017 to 2H18.
'Efficiency Programme' targeting a ~US$2.5bn in annual cash savings from 2016 (from capex and opex).
Adjusted Opex and SG&A are down 13% y-o-y in 2015; continued downward trend
ENI Projecting an average oil price of : US$45/bbl for 2016-2017 US$63/bbl for 2018-2019
Shifting focus to proven plays and near field exploration. Main exploration activities will be concentrated in North Africa, West Africa and the Far East. Production growth is planned for a >3% growth rate from 2016-2019.
Delayed the spudding on wildcat well on the Dazzler prospect in the Barents Sea off Norway until 2017. Deferred drilling plans at ultra-deepwater Kekra field until late-2016.
Opex per barrel reduced 13% in 2015 already, and is targeted to be another 3-11% lower over 2016-2019 relative to 2015 levels.
Source: Companies, Newswires, Upstream
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Industry Focus
Oil and Gas
Key drilling contractors – Unprofitably low dayrates and utilisation Double whammy of lower dayrates and utilisation; stacking/scrapping to accelerate. Drilling contractors – or rig owner/operators – face dual headwinds: languishing oil prices have reduced demand for their rigs, with most major contractors guiding for lower utilisation and dayrates in 2016. In particular, contractors are concerned about the operational viability of older rigs (<30yrs old). These old rigs require significant maintenance capex to remain operational, especially if a 5-year special survey is imminent. As such, unless jobs at attractive dayrates present themselves, it could be difficult for contractors to economically justify keeping them active; more scrapping and stacking are expected. Jackup supply glut remains worrisome... Meanwhile the supply-side for jackup rigs remains challenging, with 90% of the newbuild jackup fleet being speculative – defined as not
having secured a contract within six months of the order date – and the orderbook-to-fleet ratio remaining relatively high at 26% (vs. historical average of 16-17% between 2009-2014). This will place further downward pressure on utilisation and day rates if contractors take delivery of rigs, but low penalties at certain yards will likely incentivise more deferrals. ... with a similar picture for floaters. The semisub and drillship orderbook-to-fleet ratios are comparatively reasonable, at 13% and 31% respectively – nowhere near their highs of ~30% and ~110% in recent years. Nonetheless, there are 44 newbuild floaters scheduled for delivery before the end of 2018, of which 40 remain uncontracted. Contractors are thus predicting further deferrals and cancellations of newbuild floaters as well, as rig owners have little incentive to take delivery of these rigs without firm contracts on hand.
Key drilling contractors and their latest plans, comments and outlook
Company Total MODUs Plans/ Outlook Ensco 68 • Capex estimates: FY16 US$450m; FY17 US$450; FY18 Capex US$325m, significantly down from FY15 Capex of
US$1.6bn. No newbuild beyond FY18. • On track with cost reduction target of US$57m,15% reduction in offshore labor costs and 30% reduction of onshore workforce as of 4Q15 • Scrap or permanently retire 4 floaters and 8 jackups in FY16 • Outlook: Dayrates and utilisation are expected to remain under pressure in 2016 for both floaters and jack-ups; for 1Q16, estimated 7-8% decline in average day rates, utilisation in line with 4Q15 at low 60%. Old jackups and floaters >30yrs old may be unable to find additional work upon contract expiry, and special survey cost may induce scrapping/stacking of these rigs; there are ~90 floaters candidates for scrapping and ~145 jackups candidates for scrapping or conversion to non-drilling units by FY17.
Transocean 61 • Deferring delivery of 9 newbuild rigs • Capex estimates: FY16 reduced to US$1.4bn (original: US$1.8bn); FY17 US$600m (original: US$1bn) • Outlook: Number of drilling contract awards not expected to increase in 2016, exacerbating the current excess rig capacity, leading to lower utilisation and dayrates. More customers are terminating contracts early, further exacerbating oversupplied environment. Jackup market is also exacerbated by few rigs being cold stacked for scrap and newbuild deliveries continuing unabated. Scrapping activity is expected to be slower with the relatively low costs associated with stacking up a jackup. Utilisation and dayrates are rapidly declining; should persist into 2017.
Seadrill 54 • In FY15, deferred/ renegotiated/ cancelled every newbuild contracts; 15 construction-in-progress as of Feb16. As many as 8 jackups will be deferred for 44 months. • Achieved US$832m of cash savings during FY15, of which 40% arose from newbuild deferment • 4Q floater utilisation at 94%; jack-up utilisation at 97%, strongest quarter to date • Outlook: Majority of rigs with contracts expiring in 2016 will be unable to find suitable follow on work, many are likely to be idle for a protracted period and consequently cold stacking and scrapping activity will accelerate. In the meantime, oil companies continue to work on managing their existing rig capacity where in many cases overcommitted based on reduced activity levels and there is very little appetite for adding new units.
Diamond Offshore 33 • Capex estimates: FY16 US$675m, down from US$830.7m in FY15 • Outlook: Ultra-deepwater and deepwater floater markets continue to be depressed due to newbuild deliveries amidst oversupply situation and rapidly declining dayrates. It is predicted that no. of uncontracted floaters may more than double by the end of 2016. ~32 of 54 floaters on order are uncontracted. For mid-water, higher spec rigs may continue to take the place of lower spec rigs, leading to these rigs being stacked or scrapped. In total, ~100 additional floaters and 100+ jack-ups could be retired by end-2017.
Noble Corp 30 • Capex reduced to US$0.423bn FY15, down from US$2bn average from 2011-2014. Capex estimes: FY16 US$0.8m • Target 13% reduction in total costs from US$1.3bn in FY15 • Outlook: Africa and Latin America, with the exception of Mexico, are likely to be most affected by capex reductions. Further weakening in underlying commodities environment led to operators' additional cuts to previously planned 2016 capex. Suspects that the first opportunity for recovery in activity will be in 2017, with the capital planning for that calendar year expected to begin by the middle of 2016.
Rowan 31 • No newbuild capex commitments outstanding; total capex US$180-190m vs. 2015's total capex of US$722.9m • Estimates that operating expenses will be reduced by 10-13% YoY in FY16 • Outlook: Focus will be on operating efficiencies and cost control, which could include stacking or retiring additional rigs. Likely to enter into contracts at substantially lower day rates to secure contract as competition from newbuild additions continue to pressure day rates and utilisation. As of Feb16, ~125 jackups under construction for delivery before 2020 (currently there are 328), of which only 7 of 82 that will be delivered in 2016 have contracts; ~70 floaters under construction for delivery before 2020 (currently there are 188), of which only 9 of 22 that will be delivered in 2016 have contracts.
Source: Companies
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Industry Focus
Oil and Gas
Rigbuilding – supply glut takes time to ease We maintain our cautious stance on rig orders, which will likely lag behind an oil price recovery given the supply glut, which will take time to be absorbed. We need oil prices to recover to sustainable levels, pushing up rig demand, utilisation and charter rates to incentivise rig operators to place orders. Meanwhile, we may see more deferments and cancellations in 2016. Rig builders in a prolonged downturn. Utilisation for competitive premium rigs fell to 68%, from 72% in December 2015 and 84% a year ago. Aggravating the situation is a total of 173 newbuild rigs are expected to come on stream in the next two years, adding to supply woes and further plaguing the rig-building sector. The further capital expenditure and operating expenditure cuts by oil majors do not help the situation. Contract flow driven by non-rig orders. New order wins for Singapore rigbuilders dwindled from S$9 billion in 2014 to S$5 billion last year (Keppel: S$1.8 billion; Sembcorp Marine: S$3.2 billion). These were driven largely by non-rig orders, for instance floating liquefied natural gas (FLNG) vessels, semi-submersible crane vessels, specialised vessels, and conversion works. Globally, there were only three newbuild jackup rig orders contracted last year in the Middle East and China for local deployment.
In Apr, Keppel won its first new order this year with the clinch of S$190m worth of FPSO fabrication and integration project while SMM has yet secured any so far this year. Earnings downside risks from rescheduling. If the identified riskier orders are pushed back by another year, earnings forecasts would be revised downwards. The declining activities also take a toll on yards’ efficiency. Are provisions adequate? We estimate that up to 35% discount to contract value has been factored in in SMM’s S$280m provision for non-Sete projects, which seem sufficient at this point. Keppel could see rising pressure to make first provisions for the non-Sete projects, by up to S$200m based on our back-of-the-envelope calculation. For Sete projects, we believe the milestone payment, ~35% of total contract value, offers good buffer for the seven units at the advanced stages, thus preventing the stakeholders of Sete from cancelling. Cancellations risks are higher for the remaining six units at <20% completion. We are unsure if the provision made is sufficient to cover the liability to vendors.
Rig fleet - Drillships, jackups, and semi-submersibles
Drillship Jackup Semi-submersible New Retire End YoY chg New Retire End YoY chg New Retire End YoY chg
Offshore Support Vessels – the survival game Utilisation and day rates for Offshore Support Vessels (OSV) to remain under pressure in 2016 and 2017 as vessel-to-rig ratios look worse than post-global financial crisis levels. The panic reaction to depressed oil prices has again led to a wide supply-demand gap in the already highly competitive OSV market and, given the expected volatility in oil prices going forward, demand may not recover very soon. Thus, we believe OSV owners and operators will struggle to stay profitable in 2016 and 2017. Asia Pacific OSV fleet utilisation trends
Source: IHS Petrodata, DBS Bank Further decline in day rates can’t be ruled out. In terms of markets, both the deepwater North Sea market and shallow water Southeast Asia market have been affected to a great extent in terms of utilisation and day rates. Only the West Africa OSV market still sees fleet utilisation levels above 80% owing to a greater presence of national oil companies. In Southeast Asia, spot anchor handling tug supply (AHTS) day rates have declined to almost US$1.10-1.20 per brake horsepower per day for lower end vessels, compared to US$1.60-1.80 per brake horsepower per day levels before the oil price decline. Platform supply vessel (PSV) day rates have declined to US$16,000-17,0000 per day levels from US$23,000 per day levels precrisis. We cannot rule out further a decline in day rates, especially for the PSV market, where supply-demand fundamentals look worse owing to the new build delivery schedule. Re-negotiations of existing contracts a reality. With day rates for vessels and rigs falling in the spot market, and oil companies increasingly under pressure to preserve shareholder returns, customers will look to renegotiate existing contracts. Most OSV players will have to deal with
cases of renegotiation, with rates cut up to 20% or more. In some cases, the customer may choose to provide extension options for contracts but, suffice to say, even operators with long-term charters are not immune to the volatility in the spot market. Southeast Asia AHTS term day rates - average
Source: IHS Petrodata, DBS Bank Southeast Asia AHTS term day rates - average
Source: IHS Petrodata, DBS Bank
Balance sheet stress and refinancing issues could crop up. Typically, OSV owners and operators and offshore contractors are highly geared, as it is an asset-intensive business. Gearing ratios in excess of one times are the norm. Apart from loans secured against vessels, companies may also draw down significant working capital loans and raise funds in the bond market. We have already seen several cases of OSV companies securing waivers of loan-related covenants from bondholders or lending banks. With earnings declining and the outlook uncertain, refinancing existing borrowings will be expensive and, in extreme cases, new credit facilities may not be available. Thus, we need to keep an eye on the near term cash flow requirements of OSV players.
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Industry Focus
Oil and Gas
M&A ACTIVITIES: Set to spike
Record levels of private equity dry powder should spur buyout activity. The low interest rate environment has encouraged investors to allocate more money to alternative investments, which has swelled private equity assets under management. According to data by Preqin, the global level of unspent capital (or dry powder) under private equity (PE) fund managers hit a high of US$752bn as of end-December 2015, representing the third year of consecutive dry powder increases. Of that amount, approximately US$140bn was sitting in the coffers of Asia-based PE funds (as of Aug 2015), which is the largest amount of dry powder the region has ever seen. In 2016, hence, PE firms, including those with an Asian focus, will face increasing pressure to deploy capital, or risk a deflation of their returns from idle assets under management. This should help spur M&A activity in the oil & gas sector from PE firms looking to capitalise on distressed valuations. O&G deals were slow in 2015... A price impasse between buyers and sellers had depressed M&A activity in the energy sector in 2015. Global O&G transactions slumped by over 20% in value last year to US$143bn, despite the boost from Shell-BG's US$85bn deal. The number of deals completed had nearly halved to the lowest level in 14 years. However, the gap is likely to close as oil remains weak even after 1.5 years. … but tipped to pick up in 2016. We expect to see a larger scale of consolidation in the O&G industry in 2016 as players suffer further financial pain, and face more constrained financing options under such climate. Private equity dry powder (in US$bn)
Source: Preqin Potential rise in asset sale and M&As in O&G space. For companies facing financing difficulties and limited access to the debt market, they might turn to the costlier equity market, strategic partnerships and/or asset sale for funding.
Among the counters under our coverage, Ezra has explored several of the above options:
Case study: Ezra - Asset Sale-and-leaseback a possibility Rights issues + Convertible bonds. Ezra has issued renounceable underwritten rights and convertible bonds in mid-2015 to fund the repayment requirement in 2015. Partial divestment to strategic partner. Subsequently, at end-Aug 2015, it proposed to divest 50% of its subsea services division to a strategic partner - Japanese engineering firm Chiyoda Corporation. The deal allows Ezra to tap on Chiyoda’s strong project management expertise, global network, R&D capabilities and financial muscle in the future. Share pledges for bond refinancing. With a S$95m bond due at end-Mar 2016, and only US$82m of non-pledged cash on its balance sheet as of end-Nov 2015, Ezra has pledged its shares in listed subsidiaries EMAS Offshore and Triyards as collateral for S$100m secured bank borrowings and paid down the maturing bond. Following the refinancing event, Ezra’s next maturing note is its SGD150m note due in Apr 2018. More asset sale? We think Ezra could consider a sale-and-leaseback option for its non-core assets to provide an additional cash buffer and ride through the current climate. In particular, it had earmarked its 42%- and 49%-owned FPSO vessels Perisai Kamelia and Lewek Emas respectively for possible rationalisation for some time now. In mid-Apr, EMAS Offshore successfully entered into a binding letter of intent to sell its combined 78.4% interest in PV Keez Pte Ltd, which owns the FPSO Lewek EMAS, to a global infrastructure investment firm. We think this could fetch the Ezra Group around US$150m, which will help provide some support to its balance sheet. Additionally, the 49% stake in the Perisai Kamelia could fetch another ~US$150m if also sold at book value (as the Lewek EMAS did). Alternatively, the Lewek Constellation was rumoured to have been considered for sale-and-leaseback back in mid-2015 (although this did not materialise eventually as a rights issue and the Chiyoda deal provided the financing needed for a S$375m debt repayment in Sep 2015). The Lewek Constellation was built at a cost of US$625m and is a state-of-the-art deepwater pipelay/heavy lift vessel sitting at the top-end of the global pipeplay vessel fleet in terms of capabilities. We think this vessel therefore makes the list as a potential sale-and-leaseback candidate again, as it could be attractive to buyers with a long-term view of deepwater offshore subsea demand.
EMAS Victoria EMAS Victoria (L) Bhd Malaysia 49.00% 151.0 49.00% 151.0
Total: 296.0
*Assuming the EMAS Victoria is transacted at Book Value – as the Lewek EMAS did. Source: Companies
Unlock value of O&G assets. For instance, Mirach Energy, listed on the SGX, is trading at very low EV/2P Reserve multiples of close to zero. The company has seen its share price plummet 95% since mid-2014; disposing some non-core O&G assets could unlock value and free up some cash flow for capex.
Who will be the buyers? We believe PE funds and companies with stronger balance sheets will take the opportunities to acquire companies that are trading at low valuation multiples (i.e. P/BV, EV/Resources, etc) as a result of sharp declines in their market capitalisations, which provide cheap access to assets during this downcycle.
Sample of junior E&P players globally
Source: Bloomberg Finance L.P, Companies Screening for Takeover / Privatisation candidates. Many oil & gas stocks have fallen in lockstep with oil prices, with the worst performances from small players on fears of insolvency. Some of the better names have thus become more appealing as potential acquisition or privatisation candidates, in our opinion. Companies with sound fundamentals and financials, ie in net cash or low net debt positions and whose share prices have fallen substantially over the past year make for attractive candidates; having a majority shareholder also brings the privatisation angle into the picture, increasing the
likelihood of M&A activity. We conducted a screen and found several Singapore/Malaysia/Thailand/Indonesia-listed stocks that fit these criteria. 1) Baker Technology. We think Baker Technology holds the most potential, due to its large cash hoard of S$140m, with net cash representing 62% of its book and 78% of its market capitalisation. Despite having a profitable engineering & fabrication business churning mid-to-high single digit ROEs, the stock is only trading at ~0.8x book, attaching little value to the its engineering capability.
Reserv es
CompanyPrimary operat ing locat ion
Mkt Cap (US$m)
Net Debt (US$m) EV (US$m)
1P (MMboe)
2P (Mmboe)
EV /1P Reserv es
EV /2P Reserv es
Abraxas Petroleum United States 101 75 176 42 N/A 4.2 Newfield Exploration United States 6,465 2,878 9,343 645 N/A 14.5 Southwestern Energy United States 3,043 6,914 9,957 1,791 N/A 5.6 Pioneer Natural Resources United States 22,818 2,264 25,082 799 N/A 31.4 Devon Energy Corporation United States 13,941 9,782 23,723 2,754 N/A 8.6 Great Eastern Energy India 35 94 129 289 N/A 0.4 Gulf Keystone Iraq 94 440 533 N/A 576 0.9 Hardy Oil & gas India 16 -21 -5 2 N/A (2.6) Premier Oil Diversified 318 2,094 2,412 N/A 243 9.9 Rockhopper Exploration South Atlantic 177 -200 -23 N/A 5 (4.6) Panoro Energy South Atlantic 27 -41 -14 2 3 (8.0) (4.5) Interoil Exploration Africa, S. America 12 43 55 4 6 13.5 9.9 Hibiscus Norway, ME 55 -36 19 N/A 27 0.7 Loyz Energy USA, Asia-Pac 27 19 47 4 9 11.7 5.1 Mirach Energy Indonesia 13 -13 0 N/A 433 0.0 Ramba Energy Indonesia 65 5 70 3 10 21.6 7.1 Interra Resources Myanmar, Indonesia 32 -18 14 2 2 9.5 8.1 RH Petrogas China, Indonesia 94 2 96 8 11 11.7 9.2 Krisenergy South & SE Asia 210 206 416 N/A 105 4.0 Linc Energy USA, Australia 12 635 646 8 139 78.8 4.7 Medco Indonesia, MENA, US 364 631 995 210 278 4.7 3.6 PT Energi Mega Persada Indonesia 187 434 621 151 4.1
A v erage: 13.7 3.9 Median: 9.5 4.1
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Industry Focus
Oil and Gas
Baker Tech fabricates steel products and components for newbuildings, repairs, conversions and upgrades of jackup rigs and liftboats. It has the proprietary "Sea Hercules" crane product that enjoys a strong presence in Asia Pacific and the Middle East. Baker Tech also engages in liftboat design and construction, including the design of a specialty liftboat for offshore wind farms; its first liftboat began construction in November 2014. Sitting on huge war chest. While the company's share price has not declined as much as other companies on this list, we believe its cash hoard of S$140m (as of 4Q15), debt-free balance sheet and design/fabrication capabilities that could easily complement the offerings of other offshore & marine companies make it an attractive takeover candidate.
The company has posted encouraging results (gross margins of 26% and 28% in FY14 and FY15 respectively; net margins of 16% and 17% in FY14 and FY15 respectively), but has had its returns depressed by its sizeable cash hoard. ROE was 5.9% in FY14 and 4% in FY15. A strategic acquirer could therefore benefit by deploying this cash effectively and boosting Baker Tech's returns. Potential acquirers. We think potential acquirer companies include: i) Liftboat operators, which could benefit from Baker Tech's expertise in liftboat design, in addition to synergies from its component fabrication business; ii) Other yards that are suffering from weak orders from more oversupplied segments such as offshore support vessels and jack-up rigs; and iii) Private equity firms, who could take advantage of Baker Tech's large cash balance and swoop in with a leveraged buy-out deal.
Baker Technologies
Ticker Short Name Exchange Top shareholder % owned Net D/E LF P/B P/E
Source: Bloomberg Finance L.P., DBS Bank 2) PACC Offshore Services Holdings (POSH) IPO-ed in 2014 at a listing price of S$1.15. The parent – Kuok (Singapore) Ltd (“Kuok Group”) - who owns 81.89% in POSH could be incentivised to buy back the remaining stake and take it private as share price has plunged over 65% to S$0.37 since IPO. POSH raised approximately S$375m during the IPO, which was mainly utilised to pare down its debt with various banks.
Assuming it has to offer a 30% premium to POSH’s current share price, Kuok Group will only have to fork out ~S$160m, less than half of the new money raised in 2014. A future re-listing may be considered when the O&G cycle turns. POSH is the only O&M arm for Kuok. Kuok Group's other businesses are bulk shipping and fertilizer/chemical/sugar trading.
POSH
Ticker Short Name Exchange Top shareholder % owned Net D/E LF P/B P/E
Source: Bloomberg Finance L.P., DBS Bank 3) Mermaid. The low P/B valuation could be attractive for Thoresen Group to privatize the company. Current valuation at 0.37x P/B is near historical lows since listing, when its P/B ratio was above 2.5x. Despite recent weakness in subsea utilisation rates and rate cuts from Saudi Aramco on its associate AOD rigs, a buyer with a long-term perspective could benefit from Mermaid’s incoming state-of-the-art tender rigs and DSVs, and a future recovery in the IRM market as oil prices stabilize.
Thoresen Thai Agencies has a cash balance of S$291m, while Mermaid's market cap is ~S$200m. Hence, about S$84m is required to privatize the company - a manageable sum. However, we do not expect much synergies on the operations front, as Thoresen's other divisions are in dry bulk shipping, mining, fertilizer and warehousing.
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Industry Focus
Oil and Gas
Mermaid
Ticker Short Name Exchange Top shareholder % owned Net D/E LF P/B P/E
Source: Bloomberg Finance L.P., DBS Bank 4) Malaysia Marine & Heavy Engineering (MMHE). MMHE’s market cap is RM1.5bn, and parent MISC owns 66.5% in MMHE. This means that MISC requires only around RM0.5bn to acquire the remaining 33.5% stake, which we believe is manageable given that the company is in a net cash position. In terms of earnings accretion, MMHE’s privatisation may not be positive in the immediate term as MMHE is trading at a high 24x FY16 PE relative to MISC’s 13.6x. However, this is partly due to the slump in shipbuilding activity amidst sector downturn. On PB terms, MMHE is trading at a reasonable valuation of 0.75x PB and has a sound balance sheet. Synergy-wise, MMHE has repair and fabrication facilities for offshore vessels/structures including crude tankers & LNG
tankers, so there could be some cost savings from a consolidation. For MISC: Avenues for organic earnings growth have largely faded as the petroleum segment has firmly turned around, chemical segment losses have been curtailed, and there are limited opportunities for new contract awards in the LNG shipping and offshore segments (because of the tough operating environment). As such, MISC would have to rely on inorganic growth opportunities in order to lift earnings to the next level. Backed by a huge war chest, MISC is looking to buy assets in the oil & gas, LNG shipping and petroleum shipping sectors, at distressed valuations.
MMHE
Ticker Short Name Exchange Top shareholder % owned Net D/E LF P/B P/E
% increase/(decline) in price since Dec 2014
MMHE MK Equity MALAYSIA MARINE Bursa Malays Misc Bhd 66.50% -32% 0.75 45.0 -29%
Source: Bloomberg Finance L.P., DBS Bank 5) Rig Tenders. The company is principally engaged in the chartering of tugs and barges to transport coal and other bulk aggregates to coal mining industry as well as chartering of supply vessels and accommodation and work over barges to support offshore oil and gas industry. Majority owner is a subsidiary of Scomi Group, called Scomi Energy Services Bhd (SES MK Equity), both listed on Bursa Malaysia. SES's latest reported cash balance is RM201m, while RIGS has a market cap of IDR89bn (approx RM26m),
of which 80% is already owned by SES. The remaining 20% would come up to about RM5.4m - peanuts for the parent company to cough up to acquire. Looking at PE valuations, SES has a trailing PE of 10.8x while RIGS has no meaningful PE due to negative earnings. Synergies: This may not be apparent at this juncture. SES' other main division is drilling services - provision of drilling fluids, chemicals, and supply/manufacturing of equipment. But it will probably be able to derive cost savings from lower SG&A from not having to maintain a listed subsidiary.
Rig Tenders
Ticker Short Name Exchange Top shareholder % owned Net D/E LF P/B P/E
% increase/(decline) in price since Dec 2014
RIGS IJ Equity RIG TENDERS Indonesia Scomi Marine Services 80.54% -4% 0.08 N/A -48%
Source: Bloomberg Finance L.P., DBS Bank
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Industry Focus
Oil and Gas
VALUATION: Is it time to bottom-fish? O&G stocks badly hit; but imminent re-rating catalysts are uncertain. O&G stocks have lost up to almost 90% of their market values, since the oil price collapsed in mid-2014. Stock prices enjoyed a decent rally in Mar alongside oil’s rebound. But it was short-lived in the absence of sustainable fundamental improvements. We reckon oil prices should remain the key catalyst to drive the sector's valuation, which will probably remain volatile towards 2H16. Besides keeping a watch on the M&A potential that we highlighted in the earlier section, investors may accumulate beneficiaries of low oil prices – for instance the refineries, and take positions in solid names on pullbacks ahead of recovery. BUY Thailand downstream players that benefit from low oil prices. Refineries should eventually benefit from lower feedstock and fuel cost. We continue to like PTT Global Chemical (PTTGC) and Bangsak Petroleum (BCP) in current low oil price environment. Singapore rigbuilders dragged by Brazil overhang and deferment/cancellation risks; BUY SCI. We believe the recent rally in rigbuilders are unwarranted amid all the uncertainties in Brazil and the oil market. The three Singapore large-cap O&M names, sorted in declining order of preference, would be SCI, Keppel and SMM. Stripping out SMM’s and Salalah’s market capitalisation, the SCI's utility business remains fairly undervalued at a low 7x PE and 0.7x P/BV, despite the recent re-rating. We reiterate our BUY call on SCI. Please refer to our reports Singapore Rigbuilders – Merger on the cards dated 27-Jan-2016; and Singapore Rigbuilders – Looming credit risks dated 11-Mar-2016)
OSV players struggle to remain profitable in the near term; Ezion amongst the best proxies. Given the lack of new contracts, most OSV operators are willing to sacrifice on day rates in order to shore up utilisation. Under these circumstances, OSV operators will struggle to break even. But OSV shipbuilders will be hit even worse in our view during this downturn, as new orders dry up. Ezion remains the best proxy to ride any oil price rebound and near term catalyst stems from its successful foray into Chinese windfarm market. Please refer to our recent report Oil and Gas – Sinking further? dated 15-Mar-2016) Malaysia: Continue to like SapuraKencana and Pantech. With PETRONAS’s official release guiding for further opex and capex reductions by RM50bn for the next four years, contract flow could remain slow this year. The bulk of PETRONAS’s capex could be ploughed into RAPID as the completion deadline of the project in 2019 draws nearer. Pantech would be a prime beneficiary with downstream RAPID activities continuing to fuel its earnings growth story. We also like SapuraKencana for its strategic business position which is stretched across the O&G value chain. Please refer to our recent report Malaysia Oil and Gas – Overall outlook dated 11-Apr-2016) Indonesia: Slow progress on energy reform. We have a HOLD call on Medco as its low-cost structure should help it to cope with the current situation. While valuation is undemanding, the risk is whether Medco can monetise its reserves at an attractive profitability level. We have Fully Valued rating for Elnusa. Concerns on Elnusa remain contract fee renegotiation and lack of new contracts.
Page 19
Industry Focus
Oil and Gas
Peer comparisons – Offshore Marine/ Oil & Gas Services
Where we differWhere we differWhere we differWhere we differ:::: In line Analyst Pei Hwa Ho +65 6682 3714 [email protected]
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((US$US$US$US$ m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF
Revenue 387 351 369 479 EBITDA 309 267 281 298 Pre-tax Profit 226 38 92 107 Net Profit 224 37 91 106 Net Pft (Pre-Ex, Aft Pref Div)* 179 95 83 98 EPS (S cts) 19.5 3.2 7.8 9.1 EPS Pre Ex, Aft Pref Div (S cts) 15.6 8.3 7.1 8.4 EPS Gth (%) 26 (84) 144 16 EPS Gth Pre Ex, Aft pref div (%)
21 (47) (14) 19 Net DPS (S cts) 0.1 0.0 0.0 0.0 BV Per Share (S cts) 93.9 95.9 104.3 112.8 PE (X) 3.2 19.4 7.9 6.8 PE Pre Ex, Aft Pref Div (X) 4.0 7.5 8.7 7.4 P/Cash Flow (X) 3.3 3.4 3.5 3.1 EV/EBITDA (X) 6.7 8.3 7.2 6.3 Net Div Yield (%) 0.2 0.0 0.0 0.0 P/Book Value (X) 0.7 0.6 0.6 0.6 Net Debt/Equity (X) 0.9 1.1 0.9 0.7 ROAE (%) 24.5 2.1 7.1 7.8 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): (17) (14) Consensus EPS Consensus EPS Consensus EPS Consensus EPS (S ctsS ctsS ctsS cts):::: 7.5 10.0
Source of all data: Company, DBS Bank, Bloomberg Finance L.P
Diversification on track
Maintain BUY on Ezion with a TP of S$0.85,Maintain BUY on Ezion with a TP of S$0.85,Maintain BUY on Ezion with a TP of S$0.85,Maintain BUY on Ezion with a TP of S$0.85, based on 0.7x
FY16 P/BV. We remain optimistic on Ezion’s ability to survive
through this downturn with its solid management team,
network and assets. Re-rating catalysts stem from earnings
recovery with the resumption of service rigs currently under
repair/upgrades, delivery of newbuild liftboats, and successful
diversification of customer base to win new charter contracts.
4Q15 hit by asset impairments.4Q15 hit by asset impairments.4Q15 hit by asset impairments.4Q15 hit by asset impairments. Ezion reported a net loss of
US$63.5m in 4Q15 due largely to asset impairments of
US$81m for its own fleet and US$12m share of associate
losses from Ausgroup. Core earnings were also weaker than
expected with gross margins contracting 26.8ppt y-o-y and
5.1ppt q-o-q to 23.8%. We trim our FY16/17 estimates by 14-
17%, factoring further push-back in delivery schedule.
Successful takeoff of windfarm plan.Successful takeoff of windfarm plan.Successful takeoff of windfarm plan.Successful takeoff of windfarm plan. China has set a target of
5GW of installed offshore wind capacity by 2015 and 30GW
by 2020 in its current 5-year plan. It is behind schedule with
only approximately 2.5GW offshore wind capacity installed. A
liftboat could facilitate installation of 200MW offshore wind
capacity a year. Assuming 27.5GW wind capacity to be
installed over the next five years or 5.5GW per year, 25-30
liftboats would be required in China. Ezion has signed a MOU
with one of the top five IPPs in China to speed up the
installation of offshore windfarms using liftboats.
Valuation:
We value Ezion based on 0.7x FY16 P/BV, arriving at a target
price of S$0.85. This implies a 37% upside potential.
Key Risks to Our View:
Rate reduction and contract terminations Rate reduction and contract terminations Rate reduction and contract terminations Rate reduction and contract terminations
We estimate that every 1% decline in average day rates will
reduce Ezion’s bottom line by 3%. We have prudently
assumed a 20% rate reduction in FY16 and a further 5% in
FY17. Five service rigs are due for charter renewals in FY16.
Besides, the Mexican contracts appear to be at risk of
termination as these consist of the few units that are deployed
for drilling and there have been several cancellations in that
region. Competition might be keener ahead with more new
entrants attracted to the growing liftboat market.
At A Glance Issued Capital (m shrs) 1,595
Mkt. Cap (S$m/US$m) 989 / 720
Major Shareholders (%)
Thiam Keng Chew 14.2
Commonwealth Bank Of Austr 8.8
Guoline Capital 7.6
Free Float (%) 76.7
3m Avg. Daily Val (US$m) 6.0
ICB IndustryICB IndustryICB IndustryICB Industry : Oil & Gas / Oil Equipment; Services & Dist
DBS Group Research . Equity
15 Mar 2016
Singapore Company Guide
Ezion Holdings Version 6 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report
65
115
165
215
265
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Relative IndexS$
Ezion Holdings (LHS) Relative STI INDEX (RHS)
Page 22
ASIAN INSIGHTS VICKERS SECURITIES
Page 2
Company Guide
Ezion Holdings
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
CharterCharterCharterCharter----backed fleet expansion.backed fleet expansion.backed fleet expansion.backed fleet expansion. Since the delivery of its first
liftboat, the Lewek Leader, in Jan 2010, Ezion has expanded its
fleet rapidly to 26 service rigs. Based on the existing schedule,
management expects another 2/7/2 units to come on stream by
in 2016/17/18. All the vessels under construction have already
secured back-to-back contracts and will start contributing to
earnings upon delivery to customers.
Rate reduction an uncertainty. Rate reduction an uncertainty. Rate reduction an uncertainty. Rate reduction an uncertainty. While we expect sequential
improvement from the maiden contribution of the 10 new
service rigs to be delivered this year and resumption of the 10
vessels currently under repair at yards, the pace of earnings
growth is dependent on the magnitude of rate reduction. With
oil price plunging to sub-US$30, rate renegotiation is inevitable.
Against this backdrop, we have factored in a 20-25% discount
in 2016-2017.
PickPickPickPick----up in offshore logistic revenue.up in offshore logistic revenue.up in offshore logistic revenue.up in offshore logistic revenue. Ezion’s Australian offshore
logistic fleet comprises 10 tugs and 30 ballastable barges.
Ballastable barges, which have specially reinforced decks, have
been modified to carry heavy offshore platforms and jackets.
Demand for such high-end vessels has fallen off the cliff since
4Q14, with the construction of major Australian LNG projects
coming to an end. This was exacerbated by depressed oil prices
that have discouraged customers from exercising charter
options after the initial term of 18 months.
We estimate overhead costs to be around US$20m a year,
taking into account depreciation, crew costs and interest
expense. Upside potential would come from a stronger-than-
expected demand or disposal of the fleet, which has a carrying
value of around US$250m. However, we believe it is not easy to
find buyers in the current climate.
Contract wins from windfarm expansion to fuel growth.Contract wins from windfarm expansion to fuel growth.Contract wins from windfarm expansion to fuel growth.Contract wins from windfarm expansion to fuel growth. During
the peak of its contract wins, Ezion won 12/9/7 new charter
contracts in 2012/13/14 respectively. The contracting pace is
expected to slow down, constrained by Ezion’s stretched
balance sheet. But the unexpected collapse in oil prices has
accelerated the decline as some customers have held back the
award of new contracts or have negotiated down charter rates.
We believe demand will continue to grow in this region as
liftboats/service rigs are in early stages of the industry cycle, to
substitute workboats and barges that are traditionally used to
support offshore production platforms. Ezion enjoys first-mover
advantage to tap the industry’s growth. In addition, its recent
venture into offshore windfarm could be a medium-term
growth engine as well.
Total fleet
Operating fleet
Source: Company, DBS Bank
18
21
27
37 37
0.0
4.7
9.3
14.0
18.7
23.4
28.0
32.7
37.4
2013A 2014A 2015A 2016F 2017F
18 18 17
37 37
0.0
7.5
15.1
22.6
30.2
37.7
2013A 2014A 2015A 2016F 2017F
Page 23
ASIAN INSIGHTS VICKERS SECURITIES
Page 3
Company Guide
Ezion Holdings
Balance Sheet:
High net gearing of 1.1x; backed by longHigh net gearing of 1.1x; backed by longHigh net gearing of 1.1x; backed by longHigh net gearing of 1.1x; backed by long----term charters.term charters.term charters.term charters. Solid
order backlog of approx. US$2bn translates into revenue
coverage of >3x, 1.5x its net debt of US$1.3bn. Risks of
defaults and cancellations are low, given its reputable clientele
base that consists largely of NOCs and IOCs.
Sound financial hSound financial hSound financial hSound financial healthealthealthealth. Net debt/EBITDA is expected to hover
around 5.0x in 2016. Current ratio of c.1.0x indicates Ezion’s
ability to service short-term financing needs that may arise.
Ezion should be able to meet its interest payments with c.3x
net interest coverage ratio.
Share Price Drivers:
Oil price rebound. Oil price rebound. Oil price rebound. Oil price rebound. Oil price is a leading indicator and key re-
rating catalyst for O&G sector as the market has widely priced
in the weak earnings and new lower norm of oil prices. We
believe Ezion is one of the best proxies to ride the recovery,
given its earnings resiliency and growth potential.
Vessel deliveries.Vessel deliveries.Vessel deliveries.Vessel deliveries. Besides the delivery rescheduling, 10 of
Ezion’s service rigs have been withdrawn from its fleet for
repairs/upgrades. The resumption of these rigs in 2016 should
drive earnings recovery. In addition, Ezion is expected to take
delivery of 2/7/2 vessels in 2016/17/18, driving growth into
2017. Key downside risk is a rate reduction greater than the
20-25% factored into our model.
New contracts/renewals at good New contracts/renewals at good New contracts/renewals at good New contracts/renewals at good rates.rates.rates.rates. Securing new/renewal
of charter contracts at good rates would alleviate concerns
over contract cancellations and rate reductions and thus lower
the risk premium ascribed to the company.
Key Risks:
Rising interest rates. About 60Rising interest rates. About 60Rising interest rates. About 60Rising interest rates. About 60----70% of its debts70% of its debts70% of its debts70% of its debts have been have been have been have been
swapped to fixed rates, lowering the sensitivity.swapped to fixed rates, lowering the sensitivity.swapped to fixed rates, lowering the sensitivity.swapped to fixed rates, lowering the sensitivity. We estimate
that every 100-bp increase in interest rates could reduce
Ezion's net profit by approximately 4%. Rate reduction and contract terminationsRate reduction and contract terminationsRate reduction and contract terminationsRate reduction and contract terminations. Five service rigs are
due for charter renewals in FY16. In terms of termination, the
Mexican contracts appear to be at risk as these consist of the
few units that are deployed for drilling and PEMEX has
exercised early termination clauses on a couple of drilling rigs
last year and is facing liquidity crunch because of the oil price
collapse.
Keener competition.Keener competition.Keener competition.Keener competition. The rising acceptance and growing
demand for liftboats have attracted new entrants to the
market. We estimate that there are c.20 new liftboats currently
under construction to be delivered largely in 2017. We believe
demand growth should outpace supply growth in the under-
penetrated Asia-Pacific region.
Company Background
Ezion provides service rigs and offshore logistics support
services to the offshore oil & gas industry. It was one of the
first companies to introduce liftboats in Asia and the Middle
East regions. Ezion had a total of 26 service rigs delivered and
18 service rigs in operation as of end-2015. The fleet is
expected to grow to 28 vessels by end-2016 and 35 by end-
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Revenues (US$ m) Production and maintenance support
376 312 295 400 Exploration and development support
PricePricePricePriceRat ing Rat ing Rat ing Rat ing
1: 14 May 15 1.19 1.50 BUY
2: 19 May 15 1.13 1.50 BUY
3: 21 May 15 1.08 1.50 BUY
4: 22 Jun 15 1.09 1.50 BUY
5: 17 Aug 15 0.66 1.00 BUY
6: 18 Sep 15 0.72 1.00 BUY
7: 26 Oct 15 0.74 1.00 BUY
8: 13 Nov 15 0.66 1.00 BUY
9: 16 Nov 15 0.66 1.00 BUY
10: 15 Dec 15 0.57 1.00 BUY
11: 17 Dec 15 0.60 1.00 BUY
12: 11 Jan 16 0.57 1.00 BUY
13: 14 Jan 16 0.55 1.00 BUY
14: 18 Jan 16 0.50 1.00 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 25 Jan 16 0.51 1.00 BUY
16: 01 Feb 16 0.50 1.00 BUY
17: 10 Feb 16 0.50 1.00 BUY
18: 15 Feb 16 0.51 1.00 BUY
19: 22 Feb 16 0.52 1.00 BUY
20: 23 Feb 16 0.50 0.85 BUY
21: 02 Mar 16 0.52 0.85 BUY
1
2
3
4
5
6
78
910
11
12
13
14
15
16
17
18
19
20
210.46
0.56
0.66
0.76
0.86
0.96
1.06
1.16
1.26
Mar-15 Jul-15 Nov-15
S$S$S$S$
Page 27
ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM
FULLY VALUED Last Traded Price: S$0.11 (STI : 2,837.00) Price Target : S$0.09 (13% downside) Potential Catalyst: Oil price rebound, M&A activity Where we differ: More conservative on subsea revenue and tender drilling contracts Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team
Price Relative
Forecasts and Valuation FY Sep (US$m) 2014A 2015A 2016F 2017F Revenue 412 337 165 195 EBITDA 103 41.2 52.1 50.1 Pre-tax Profit 57.5 (231) 2.37 (10.8) Net Profit 49.5 (229) 1.89 (10.8) Net Pft (Pre Ex.) 51.0 4.99 1.89 (10.8) Net Pft Gth (Pre-ex) (%) 218.8 (90.2) (62.0) nm EPS (S cts) 4.81 (22.3) 0.18 (1.0) EPS Pre Ex. (S cts) 4.96 0.49 0.18 (1.0) EPS Gth Pre Ex (%) 79 (90) (62) nm Diluted EPS (S cts) 4.81 (22.3) 0.18 (1.0) Net DPS (S cts) 1.20 0.0 0.0 0.0 BV Per Share (S cts) 54.9 31.3 31.5 30.4 PE (X) 2.2 0.0 57.5 nm PE Pre Ex. (X) 2.1 21.8 57.5 nm P/Cash Flow (X) 2.1 17.3 2.8 3.2 EV/EBITDA (X) 1.3 3.8 5.0 9.4 Net Div Yield (%) 11.3 0.0 0.0 0.0 P/Book Value (X) 0.2 0.3 0.3 0.3 Net Debt/Equity (X) 0.0 0.2 0.5 1.2 ROAE (%) 9.2 (51.7) 0.6 (3.4) Earnings Rev (%): nm (1) Consensus EPS (S cts): 96.9 177 Other Broker Recs: B: 1 S: 1 H: 0
Source of all data: Company, DBS Bank, Bloomberg Finance L.P
More pain ahead 4Q15 results were weak; impairments larger than expected. The Group incurred a loss of US$245m for the quarter as Mermaid booked a US$163m impairment charge on its assets and a US$65m share of impairment from associate Asia Offshore Drilling (AOD), suggesting a roughly 40% haircut on vessel/rig asset values. Subsea vessel utilisation dipped to 56% in 4Q15, down from ~80% in the previous two quarters, a result of both a challenging subsea market and seasonal factors. AOD also implemented a retrospective rate reduction (which was expected), leading to a US$9m loss from associate. Revenues to taper off hereon as charter vessels are returned; orderbook has also shrunk. Revenues will take a hit from 2016 onwards as Mermaid returns its three long-term chartered-in vessels this year (two have already been returned; one is still on-hire until end-2016). Orderbook levels also remain low, at US$255m, implying lesser jobs for the working vessels too. Key overhangs remain. Newbuild tender rigs MTR-3 and MTR-4, and the DSV Mermaid Ausana – all scheduled for delivery by 2017 – remain without secured contracts, while the two old tender rigs are both cold stacked, having not found buyers yet. Meanwhile, we think there is a risk of further rate cuts for the AOD jackup rigs, as their US$162k day rate is still 20-40% above recent fixture rates on similar rigs in the Middle East; in the worst case scenario, contracts may not be renewed. Valuation:
We maintain our TP of S$0.09 (0.3x FY16F P/BV). In line with downside risk to earnings for FY16/17 and a drop in book value following asset impairments, we retain our FULLY VALUED call on the counter as the order outlook remains challenging. Key Risks to Our View:
Only a sharp spike in the oil price – albeit unlikely in our view – could result in some respite from the gloom surrounding the offshore services industry currently. At A Glance Issued Capital (m shrs) 1,413 Mkt. Cap (S$m/US$m) 150 / 109 Major Shareholders (%) Thoresen Thai Agencies PCL 58.2 Thailand Equity Fund 19.1
Free Float (%) 22.7 3m Avg. Daily Val (US$m) 0.02 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist
DBS Group Research . Equity 7 Mar 2016
Singapore Company Guide
Mermaid Maritime Version 3 | Bloomberg: MMT SP | Reuters: MMPC.SI Refer to important disclosures at the end of this report
32
52
72
92
112
132
152
172
192
212
0.1
0.2
0.3
0.4
0.5
0.6
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Relative IndexS$
Mermaid Maritime (LHS) Relative STI INDEX (RHS)
Page 28
ASIAN INSIGHTS VICKERS SECURITIES Page 2
Company Guide
Mermaid Maritime
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Subsea fleet utilisation is critical. While subsea contracts involving diving and other services usually result in good margins, the contract durations tend to be short (around 3-6 months) and hence, gaps between contracts need to be continuously filled up. In the past, Mermaid had built up a fleet ahead of demand in some cases, resulting in underutilisation of fleet and losses. With orderbook declining to US$255m as of 4Q15 from a high of US$473m at end- FY14, Mermaid has negotiated a penalty-free return of its three long-term chartered-in vessels post-completion of their current jobs in 2016 (two of these have already been returned). This will help shore up fleet utilisation in the near term but indicates lower targets for orderbook and revenues in the process. If utilisation targets are not met, the subsea division could be looking at operating losses in FY16/17. Older tender rigs are off-hire, needs to secure charters for the newbuilds MTR-3 and MTR-4. Mermaid has a long track record in the niche tender rig business in SE Asia but its older rigs are more than 30 years old and are currently being marketed for sale. It is currently building two new tender rigs as replacement, scheduled for delivery in late 2016. Securing long-term contracts for these two new rigs ahead of delivery would go a long way in boosting confidence. Drilling segment is key contributor but susceptible to rate revisions. Contributions from Mermaid’s 34%-owned drilling rig associate AOD was ~US$20m for FY15, versus a full-year Group net profit of US$5m; thus, without AOD contribution, Mermaid would have incurred a loss in FY15 (after extraordinary items). AOD has three drilling rigs chartered out to customer Saudi Aramco, and has recently seen its day rates renegotiated down by 10%. Once the 3-year charter periods end in 2016, it may choose to renew at even lower day rates, given the glut of rigs in the market. Chances of non-renewal also exist. New cable-laying business may lose its sheen. Mermaid established a new cable-laying business in the Middle East in late 2014 and seems to have conquered the learning curve, with the business being profitable four quarters in a row. However, securing additional projects has been a challenge so far and growth from this business may be slow. Acquisitions could provide earnings uplift. Having established a US$500m multicurrency Medium Term Note (MTN) programme recently, we think it is possible that acquisitions could be in sight for Mermaid. Low valuations of O&G players currently increase the likelihood that such acquisitions will be EPS accretive.
Utilisation rate - subsea fleet (%)
Avg day rate - subsea fleet (US$)
Utilisation rate - tender rigs (%)
Avg day rate - tender rigs (US$)
Source: Company, DBS Bank
69.265.9
71.2
57.2 57.1
0.0
9.0
18.0
27.0
36.0
45.0
54.0
63.0
72.0
2013A 2014A 2015A 2016F 2017F
115,348
144,980
129,113
110,559 111,556
0
29,600
59,200
88,800
118,400
2013A 2014A 2015A 2016F 2017F
58.3
48.9
10.1 10
30
0.0
11.9
23.8
35.7
47.6
59.5
2013A 2014A 2015A 2016F 2017F
55,054
88,784
100,000 100,000
0
12,600
25,200
37,800
50,400
63,000
75,600
88,200
100,800
2013A 2014A 2015A 2016F 2017F
Page 29
ASIAN INSIGHTS VICKERS SECURITIES Page 3
Company Guide
Mermaid Maritime
Balance Sheet:
Sufficient headroom for funding capex commitments. Mermaid’s net gearing remains quite low currently at ~0.2x, but this will increase over FY16/17. Capex requirements for the new DSV (~US$100m outstanding) and the new tender rigs (~US$300m total outstanding) should be funded through project debt and internal cash reserves, but the recently established US$500m multicurrency debt issuance programme may come in handy. Furthermore, of the US$107m of debt currently on the balance sheet, more than 90% are asset-backed loans of 1-5 year tenures, which lowers refinancing risk.
Share Price Drivers:
Recovery in oil prices would drive the share price. Offshore/Marine stocks tend to display a strong correlation to oil prices, which is the fundamental driver of offshore activity; a strong rebound in oil prices would undoubtedly be positive for Mermaid’s share price. Subsea contract wins are crucial to utilisation rates. If Mermaid manages to secure new contracts for its shallow water DSV fleet and boost its orderbook in the midst of this weak environment, the share price should react positively, as visibility on fleet utilisation will be key in restoring investor confidence.
Key Risks:
Subsea engineering operations are sensitive to delays in the award of offshore projects. The short-term nature of shallow water subsea projects makes Mermaid's subsea engineering revenue sensitive to delays in the award of projects, which oil majors have recently tended towards. New tender rigs could find themselves jobless. Management has noted that there seems to be some extra capacity in the tender rig market of late. The MTR-3 and MTR-4, still slated to be delivered in late 2016, could find themselves without secured contracts if the oil crisis prolongs. Jackup rigs susceptible to rate revisions. Given that the three rigs are still enjoying premium day rates of around US$160k each after re-negotiation with Saudi Aramco, these remain susceptible to further rate downside at the point of charter renewals. The customer may also choose not to renew these rigs in the worst-case scenario.
Company Background
Mermaid Maritime PCL is a provider of drilling and subsea engineering services for the offshore oil & gas industry, serving a diverse client base globally.
Contribution from MTR-3 and MTR-4 (newbuilds) expected to boost drilling segment revenues in FY17, but lack of sufficient utilisation may lead to operating losses
Note : Share price and Target price are adjusted for corporate actions.
1
2
34
56
7
8
9
10
0.09
0.14
0.19
0.24
0.29
Mar-15 Jul-15 Nov-15 Mar-16
S$
Page 33
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: YM
HOLD Last Traded Price: S$0.28 (STI : 2,656.87) Price Target : S$0.28 (2% downside) (Prev S$0.29) Potential Catalyst: Spike in oil prices, M&A / privatisation Where we differ: More conservative on 2016 earnings outlook Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team
What’s New Non cash impairments lead to losses in 4Q/ FY15
Uncertainty remains on contracts for the 2 SSAVs
Balance sheet is relatively strong
Final dividend of 0.5Sct declared
Price Relative
Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 234 281 237 288 EBITDA 106 90 91 112 Pre-tax Profit 56 (129) 10 21 Net Profit 53 (131) 10 21 Net Pft (Pre-Ex) 53 17 10 21 EPS (S cts) 4.1 (10.2) 0.8 1.6 EPS Pre Ex (S cts) 4.1 1.4 0.8 1.6 EPS Gth (%) (41) nm nm 113 EPS Gth Pre Ex (%) (20) (67) (45) 113 Net DPS (S cts) 1.5 0.5 0.5 0.5 BV Per Share (S cts) 93.7 82.3 82.5 83.6 PE (X) 6.8 nm 37.3 17.5 PE Pre Ex (X) 6.8 20.7 37.3 17.5 P/Cash Flow (X) 6.0 5.2 3.5 3.3 EV/EBITDA (X) 8.6 10.0 10.5 7.8 Net Div Yield (%) 5.4 1.8 1.8 1.8 P/Book Value (X) 0.3 0.3 0.3 0.3 Net Debt/Equity (X) 0.5 0.5 0.6 0.5 ROAE (%) 5.1 (11.5) 0.9 1.9 Earnings Rev (%): (56) (21) Consensus EPS (S cts): 2.6 3.9 Other Broker Recs: B: 2 S: 0 H: 3
Source of all data: Company, DBS Bank, Bloomberg Finance L.P
SSAV contracts remain a key risk OSV segment is relatively strong, but will face inevitable headwinds. POSH’s OSV operations have been relatively resilient versus peers owing to longer term contracts – we estimate 65-70% utilisation rate as of end-2015. Nonetheless, we expect continued pressure on both day rate and utilisation fronts in the coming quarters. Accommodation division performing well but SSAVs create downside risk. The accommodation division has assumed increased importance of late, accounting for 61% of gross profit in FY15. Gross margins for the division were also robust at about 40%. However, there remains downside risk from uncertainty surrounding the first SSAV, whose contract with Petrobras is ending in March this year with no renewal proposed yet, and the second SSAV, whose delivery date is before end of 1H16 and has yet to secure a contract. Cutting forecast numbers in light of industry weakness. We have further lowered our utilisation and day rate assumptions for POSH’s OSV vessels going forward, and pushed out the contract for the second SSAV to FY17. We are also more cautious on contributions from JV/ associates, especially from Indonesia. Hence, we have reduced our FY16 and FY17F earnings by 73% and 41% to US$10m/ US$21m respectively. Valuation:
Despite the risk to earnings and impairments on assets in FY15, POSH’s balance sheet remains relatively strong with net gearing of only 0.5x and it has also managed to refinance existing loans on attractive terms. Thus, we maintain our HOLD call with a target price of S$0.28, based on a 0.4x P/BV multiple. Key Risks to Our View:
Failure to secure charter contracts for the SSAVs. Our model now assumes the first SSAV is renewed in 2Q16 at lower rates and that the second SSAV is chartered out only in 2017. If employment for these vessels is not secured on time, there could be further downside risk to earnings. At A Glance Issued Capital (m shrs) 1,812 Mkt. Cap (S$m/US$m) 507 / 361 Major Shareholders (%) Kuok (Singapore) Limited (%) 81.9 Free Float (%) 18.1 3m Avg. Daily Val (US$m) 0.08 ICB Industry : Oil & Gas / Oil Equipment; Services & Distribution
DBS Group Research . Equity 22 Feb 2016
Singapore Company Guide
PACC Offshore Services Holdings Version 2 | Bloomberg: POSH SP | Reuters: PACC.SI Refer to important disclosures at the end of this report
25
45
65
85
105
125
145
165
185
205
0.2
0.4
0.6
0.8
1.0
1.2
Apr-14 Sep-14 Feb-15 Jul-15 Dec-15
Relative IndexS$
PACC Offshore Services Holdings (LHS)
Relative STI INDEX (RHS)
Page 34
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Company Guide
PACC Offshore Services Holdings
WHAT’S NEW
4Q15 results review
Non cash items drag POSH into the red. POSH reported a large headline net loss of US$150m in 4Q15, largely stemming from goodwill and asset impairments amidst challenging industry conditions. The group’s share of losses from JV/ associates also included a US$5.5m asset impairment impact. Stripping out these one-off non-cash items at both the POSH and JV level, we estimate POSH would have made US$4.3m net profit in 4Q15, which would bring core net profit for FY15 to US$17.5m vs. the US$131m loss reported for FY15. All segments profitable at gross level. Unlike some of its peers in the OSV business, POSH managed to remain profitable at the gross level. Gross margins for the OSV segment remained flat q-o-q at 13.6%. OSV fleet utilisation for FY15 stood at 69% (vs. 84% in FY14). The main profit driver, however, remains the Accommodation segment, with gross margins of close to 40%. While overall utilisation in the accommodation division was around 60%, the higher spec accommodation vessels and SSAVs were 100% utilised on term contracts. No visibility offered on SSAV contracts. The uncertainties regarding the Accommodation segment’s two SSAVs remain:
the first SSAV is coming off contract with Petrobras in March this year and has not secured an extension yet; management indicated that discussions with Petrobras are ongoing but day rates would be lower if the SSAV’s contract is successfully extended. Meanwhile, the second SSAV is due for delivery before the end of 1H16 after several rounds of deferrals, and still has not secured a contract; discussions are underway with various parties. But financing risks lowered. On a positive note, POSH has secured around US$1bn in bank loan facilities in 2016. About half of this will be used to refinance existing loans, which were largely revolving credit facilities. As the new facilities include about S$462m of longer term facilities with a 5-7 year tenor, this reduces future refinancing risks to a large extent. The undrawn portion can be used to fund working capital and capex needs, as well as M&A activities. Outstanding capex requirements amount to US$117m in FY16 for 12 vessels and another US$44m for 2 vessels in FY17; with the new facility in place, POSH does not have any near-term cash crunch to worry about. Financing cost for the new facility remains low – comparable to previous rates (i.e. around 2%).
Quarterly / Interim Income Statement (US$m)
FY Dec 4Q2014 3Q2015 4Q2015 % chg yoy % chg qoq
Revenue 55.8 80.4 71.8 28.7 (10.7)
Cost of Goods Sold (49.3) (62.0) (54.6) 10.7 (11.9)
Gross Profit 6.47 18.4 17.2 165.7 (6.5)
Other Oper. (Exp)/Inc (7.2) (4.3) (4.0) (44.4) (7.8)
Operating Profit (0.7) 14.1 13.2 nm (6.1)
Other Non Opg (Exp)/Inc 0.0 0.76 1.44 nm 90.1
Associates & JV Inc (5.0) 0.87 (12.4) 148.8 nm
Net Interest (Exp)/Inc (2.3) (2.6) (2.7) 16.1 1.8
Exceptional Gain/(Loss) 0.0 0.0 (148) nm nm
Pre-tax Profit (8.0) 13.1 (149) nm nm
Tax (2.0) (0.5) (0.8) (57.8) (66.5)
Minority Interest 0.0 0.0 0.0 nm nm
Net Profit (10.0) 12.6 (150) nm nm
Net profit bef Except. (10.0) 12.6 (1.2) 87.6 nm
EBITDA 6.75 31.8 18.7 176.7 (41.3)
Margins (%)
Gross Margins 11.6 22.9 23.9
Opg Profit Margins (1.3) 17.5 18.4
Net Profit Margins (17.8) 15.6 (208.4)
Source of all data: Company, DBS Bank
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Company Guide
PACC Offshore Services Holdings
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Four key vessel segments. POSH, one of the largest Asia-based providers of offshore support vessels, is the result of the M&A of several companies in the industry. There are four key business segments now: 1) Offshore supply vessels (OSV), 2) Transport & Installation (T&I), 3) Offshore Accommodation (OA), and 4) Harbour Services and Emergency Response (HSER). Thus, while POSH has a more diversified business mix than peers, but other than the HSER segment, it is still rather dependent on the level of offshore oil & gas activity, and in turn, oil prices. Being part of the Kuok Group has its advantages. POSH is a member of the Kuok Group, a respected conglomerate with diversified investments in commodities, hospitality, logistics, real estate and shipping, among others. We believe this brings three key advantages to POSH: i) Ready access to affiliated shipyards of the Kuok Group, which enables POSH to achieve faster turnaround times for newbuilds and better manage maintenance and refurbishment costs; ii) Lower financing costs; and iii) Access to the Kuok Group’s global network and connections to open new markets and expand business. SSAVs are a bold bet. The economics of these accommodation units are very attractive, owing to niche market dynamics, but finding continuous employment for these deepwater-capable high-spec vessels could be challenging given that low oil prices have curtailed interest in deepwater E&P. We think that the two SSAVs could account for over 50% of group profits if they are fully employed. The first SSAV is coming off contract with Petrobras in March 2016, while the second has had its delivery date deferred to around mid-2016, with no contract in place. We will continue to watch for news of contract renewals/fixtures for these two units. OSV division will struggle to remain profitable. OSV owners across the board have seen sharp declines in utilisation and day rates in 2015, with some companies even reporting 40-50% utilisation and AHTS day rates below US$1.00/bhp. POSH has been relatively successful in placing vessels in the spot market in FY15, which has helped bolster utilisation rates to around 70%, but there is no guarantee this performance can be repeated in 2016. Given the state of the industry, we expect performance of POSH’s OSV division to deteriorate in FY16. Associate/ JV income has taken a hit. POSH recorded US$9.5m in share of losses from JV/ associates in FY15, including US$5.5m asset impairments. The major contributor to these losses is its Indonesian JV, which operates high spec AHTS vessels, and will continue to be affected by a slowdown in exploration activities in Indonesia following the oil price decline.
OSV fleet utilisation (%)
T&I fleet utilisation (%)
Acco fleet utilisation (%)
HSER fleet utilisation (%)
Source: Company, DBS Bank
87 86.6
67.2
60.4 60.3
0.0
11.0
22.0
32.9
43.9
54.9
65.9
76.9
2013A 2014A 2015A 2016F 2017F
74.5
63.6
49.546.1 46.4
0.0
15.2
30.4
45.6
60.8
76.0
2013A 2014A 2015A 2016F 2017F
85
60.2 59.4 58.363.7
0.0
17.3
34.7
52.0
69.4
86.7
2013A 2014A 2015A 2016F 2017F
43.8
49.9 50 50 50
0.0
6.3
12.6
18.9
25.3
31.6
37.9
44.2
50.5
2013A 2014A 2015A 2016F 2017F
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Company Guide
PACC Offshore Services Holdings
Balance Sheet:
Relatively strong balance sheet should support capex commitments. POSH has deferred the delivery date of some newbuildings by about a year, which we feel is prudent amidst the volatile oil & gas environment. The company now has about US$161m of remaining committed capex for 14 vessels in its orderbook, which are scheduled for delivery up to mid-2017. The group’s strong balance sheet relative to its peers – with a net gearing of only 0.51x as of end-FY15 – and lack of near term refinancing issues leave headroom for additional debt to fund capex requirements; we anticipate net gearing to hover around 0.5x levels in FY16/17. Refinancing issues sorted. POSH has secured around US$1bn in bank loan facilities in 2016, about half of which will be used to refinance existing revolving credit facilities. As the new facilities include about S$462m of longer term facilities with a 5-7 year tenor, this reduces future refinancing risks to a large extent. The undrawn portion can be used to fund working capital and capex needs, as well as M&A activities. Financing cost for the new facility remains low – comparable to previous rates (i.e. around 2%).
Share Price Drivers:
Higher amount of offshore oil activity as a result of higher oil prices. POSH’s business is essentially a function of offshore activity. Higher oil prices are the key catalyst here, which will spur companies to invest in more capex offshore, resulting in more operational rigs as well as rig installations, increasing demand for POSH’s offshore support vessels across the oilfield lifecycle. Announcement of contract extension/fixture for the first and second SSAVs. As mentioned earlier, the successful deployment of the two SSAVs would be a significant boost to earnings, and hence, the announcement of contract wins and contract extensions for the SSAVs would be key catalysts to look out for. We are currently assuming that the first SSAV is renewed by Petrobras in 2Q16 at lower rates and that the second SSAV is chartered out in early 2017.
Key Risks:
Lack of contract wins for the two SSAVs. The worst-case scenario here is that the second SSAV is delivered sometime this year, and both SSAVs are uncontracted in 2017. Such a scenario would be detrimental to the share price performance.
Company Background
PACC Offshore Services Holdings Ltd. (POSH) is the largest Asia-based international operator of offshore support vessels and one of the top five globally. It operates a combined fleet of about 110 vessels (including JV vessels).
Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 10,895 9,545 8,667 9,324 EBITDA 1,612 1,015 1,311 1,393 Pre-tax Profit 1,246 426 838 895 Net Profit 801 549 581 626 Net Pft (Pre Ex.) 801 549 581 626 Net Pft Gth (Pre-ex) (%) (2.4) (31.5) 5.8 7.9 EPS (S cts) 44.9 30.7 32.5 35.1 EPS Pre Ex. (S cts) 44.9 30.7 32.5 35.1 EPS Gth Pre Ex (%) (2) (32) 6 8 Diluted EPS (S cts) 44.5 30.5 32.2 34.8 Net DPS (S cts) 16.0 11.0 11.1 11.2 BV Per Share (S cts) 315 360 382 406 PE (X) 6.9 10.0 9.5 8.8 PE Pre Ex. (X) 6.9 10.0 9.5 8.8 P/Cash Flow (X) nm nm 10.0 5.1 EV/EBITDA (X) 6.3 12.1 9.9 9.4 Net Div Yield (%) 5.2 3.6 3.6 3.6 P/Book Value (X) 1.0 0.9 0.8 0.8 Net Debt/Equity (X) 0.4 0.6 0.7 0.6 ROAE (%) 14.8 9.1 8.8 8.9 Earnings Rev (%): - - Consensus EPS (S cts): 30.8 33.2 Other Broker Recs: B: 10 S: 3 H: 3 Source of all data: Company, DBS Bank, Bloomberg Finance L.P
SMM Privatisation Rumour Unsubstantiated
Utilities’ discount unwarranted. Stripping out the fair value of Sembcorp Marine (SMM) and market value of Salalah and Gallant Venture, SCI’s utilities business is valued at an undemanding 0.7x P/B and 7x FY16F PE vs historical mean of 11x PE. Our SOTP-based TP of S$3.30 translates to 0.9x P/B, which is 20-30% below GFC/AFC trough. We believe this is a fair multiple in view of 9% ROE and 4% dividend yield. Reiterate BUY.
Chatter on SMM privatisation does not hold water. SCI’s PATMI slid 75% y-o-y and 50% q-o-q to S$60.8m in 4Q15, due to Marine losses (S$328m), and impairment (S$70m) charges on Utilities’ PPE. In response to the privatization rumour of SembCorp Marine, management stressed that any asset acquisitions should be accretive and enhance returns to SCI shareholders. Moreover, there are more appealing opportunities in the utilities space in view of the lacklustre marine prospects. In our view, the more likely scenario of a restructuring of rigbuilders would be the merger of Keppel O&M and SMM. As such, the elimination of fear of privatisation could give an uplift to SCI’s stock prices in the near term.
Emerging markets the growth engine. SCI’s first India power plant, fully operational since Sept-2015, is expected to contribute S$70m or 12% of FY16F PATMI. It incurred startup losses of S$22.5m last year, but is expected to turn profitable in 1Q16 with the ramp-up to >80% since end 2015. This would help to mitigate the earnings decline from Singapore power plants while other overseas utility businesses are expected to be stable this year. Besides, SCI has also made its forays into other emerging markets – Bangladesh and Myanmar, underpinning longer-term growth prospects of its utilities segment.
Valuation:
Given its diverse earnings stream and various listed assets, we derive our fair value on SCI based on the sum of its different parts, which include market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development. For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV). Our TP is arrived at S$3.30, translating to 0.9x P/B.
Key Risks to Our View:
Key risks to earnings are further deferments / cancellations of marine projects, deterioration of Singapore power’s spark spreads, and execution hiccups in India power plants.
At A Glance Issued Capital (m shrs) 1,785 Mkt. Cap (S$m/US$m) 5,498 / 3,995 Major Shareholders (%) Temasek Holdings Private Ltd 49.5 Mondrian Investment Partners 5.0
Free Float (%) 50.1 3m Avg. Daily Val (US$m) 15.2 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist
DBS Group Research . Equity 15 Mar 2016
Singapore Company Guide
Sembcorp Industries Version 4 | Bloomberg: SCI SP | Reuters: SCIL.SI Refer to important disclosures at the end of this report
45
65
85
105
125
145
165
185
205
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Relative IndexS$
Sembcorp Industries (LHS) Relative STI INDEX (RHS)
Page 41
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Company Guide
Sembcorp Industries
SOTP-based valuation for SCI
Value (S$ m)
Basis
Sembcorp Marine 1,571 Fair value for Sembcorp Marine
Gallant Ventures 63 Share price
Salalah 350 40% stake
1,984
Less: book value of listed companies (2,035) Surplus from listed companies -51 Utilities (Surplus) 267 Based on 11x FY16 PE, less book value
Urban Development (441) Based on 11x FY16 PE, less book value
Net Surplus -225
Book value as of end FY15 6,817
RNAV 6,592 RNAV per share (S$) 3.66 Fair value (S$) 3.30 10% conglomerate discount
Implied FY16 PE (x) 10.1 Implied FY16 PB (x) 0.9
Source of all data: Company, DBS Bank
Implied valuation for utilities business
Value (S$m)
Basis
SCI's market capitalisation 5,168 Market price @ 9 Mar
SCI's share of market capitalisation for:
SMM 1,571 DBS TP of S$1.24
Salalah 350 Market price @ 9 Mar
Gallant Venture 63 Market price @ 9 Mar
Congolomerate discount 10%
Implied value for Utilities 3,382
Implied FY16 PE for Utilities (x) 7.6
Implied FY16 PB for Utilities (x) 0.7
Source of all data: Company, DBS Bank
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Company Guide
Sembcorp Industries
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Utilities projects pipeline should progressively add to earnings. New facilities will add to SCI’s power generation and water treatment capacities, which should increase earnings assuming the operations are profitable. A total of 3,800MW of power generation capacity, 140tph of steam capacity and 1.3million m3/day of water treatment capacity is expected to be added from now until 2018. This roughly translates to a 36%, 3% and 14% increase in power, steam and water treatment capacities respectively. Narrowing spark spreads in Singapore have hit power generation earnings. Growth in supply of electricity outpacing the growth in consumption led to Uniform Singapore Energy Price (USEP) falling by 22% y-o-y in 2013, 21% in 2014 and by further 29% in 2015, shrinking the generator’s spark spread – a barometer of profits on electricity sales. However, the impact will not be significant, as Singapore power generation only makes up <5% of SCI’s net income. Nonetheless, an increase in USEP prices going forward will help earnings. Greater contribution from non-Singapore power generation facilities would also alleviate the pressure on profitability. Marine business (SMM) earnings are orderbook-driven. Sembcorp Marine’s (SMM) orderbook has declined to S$10.4bn as of end-2015, in tandem with the downturn in the offshore oil & gas industry. Order wins of S$3.2bn in 2015 were weak but respectable amid the current environment; 2013 and 2014 saw full-year order wins of S$4.2bn. The current orderbook stretches until 2020, but there is risk of order deferments – which would spread revenues and earnings thinner – given that drilling units account for 75% of its value. It has primarily been low oil prices that saw oil majors and asset owners defer capex spending. Hence, a rebound in oil prices should trigger more order wins for SMM, which would be positive for earnings. Urban Development business provides growth opportunities. Urban Development accounts for c.6% of SCI’s bottomline. Thus, a strong performance of this segment will not move the needle too much for now, but represents an avenue for growth. SCI has about 3,500ha of saleable land remaining across China, Indonesia and Vietnam, which it can develop. However, headwinds in the form of delays in China land sales have proven to be a stumbling block recently; better sales momentum, which we are seeing a glimmer of, would give some earnings uplift.
Marine contract wins
Source: Company, DBS Bank
4,193 4,192
3,150
2,500
3,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2013A 2014A 2015F 2016F 2017F
1.27806069
‐0.321467419
0.061017937
0.083144‐0.100755209
SCI Group Net Profit for FY15 - Total S$549m
Utilities
Marine
Urban DevelopmentOther Businesses
0.209265859
0.053884533
0.13613685
0.068852459
0.0426229510.017676408
‐0.055737705
0.527298646
Utilities FY15 Net Profit by Geography - Total S$702m
Singapore
Rest of ASEAN, Australia & IndiaChina
Middle East & Africa
UK
The Americas
Corporate
0.352179837
0.273160763
0.374659401
Utilities in Singapore FY15 Net Profits - Total S$147m
Energy
Water
On‐site Logistics & Solid Waste Management
Page 43
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Company Guide
Sembcorp Industries
Balance Sheet:
SCI’s gearing stood at 0.4x as of end 2015 – a stark contrast to a net cash position in 2013; increasing leverage at SMM has been the main reason for the increase in debt levels. Overall though, gearing remains at palatable levels and there is adequate debt headroom of approx S$3bn for SCI’s expansion capex and working capital. Share Price Drivers:
Oil price rebound would drive the share price higher. Investors would have greater confidence in the Marine business, as the operating environment improves. While drilling rig orders might lag oil price recovery, we could expect orders for production related facilities to flow through. Order wins in the Marine segment and land sales from Urban Development would bode well for SCI’s share price. While the oil price rebound would be an early indicator, securing contract wins by SMM is a more tangible indicator. More momentum in land sales would signal more hope for growth, and be positive to share price. Widening spark spreads at Singapore power plants. Signs of positive and widening spark spreads in Singapore would alleviate a key concern of investors and provide support to the share price. Key Risks:
Increasing competition in the Singapore power market. Total power generation supply in Singapore rose over 9% y-o-y in the past two years, marking the biggest y-o-y jumps since the electricity market started. This has depressed prices and hurt SCI’s bottom line. The oversupply of capacity and over-commitment of gas supply issues will likely continue to plague Singapore power market in the near-to-medium term. Execution of Indian power plants. The availability of coal supply and power purchase agreements (PPA) for SCI’s power plants in India have been a concern. We find comfort that the TPCIL plant is up and running on 86% of capacity committed on long term PPAs and operating on both domestic and imported coal. Company Background
Sembcorp Industries (SCI) is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It has facilities with 10,600 megawatts of gross power capacity and over 10 million cubic metres of water per day in operation and under development. It is also a world leader in marine and offshore engineering (via Sembcorp Marine) as well as an established brand name in urban development (comprising industrial parks as well as business, commercial and residential space) in Vietnam, China and Indonesia.
What’s New • Profit surged in 2015 despite a loss in 4Q
• BCP had net benefits from low oil prices despite
some asset impairments
• 2016F profit to be strong with 36% growth y-o-y
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((BtBtBtBt m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF
Source of all data: Company, DBS Vickers, Bloomberg Finance L.P
Keeps getting stronger Strong performance Strong performance Strong performance Strong performance totototo continue in 2016F. continue in 2016F. continue in 2016F. continue in 2016F. BCP reported a
much stronger profit in 2015, though slightly lower than our
expectation. All of its three key businesses performed well,
though the company still had to book a huge inventory loss
and some impairment charges for its E&P business. We
continue to expect further improvement of its earnings
performance in 2016F with 36% y-o-y growth in pre-extra net
profit, given the absence of huge inventory losses.
BCP’s GRM could ease to sustainable level. BCP’s GRM could ease to sustainable level. BCP’s GRM could ease to sustainable level. BCP’s GRM could ease to sustainable level. We expect BCP’s
market gross refining margin (GRM) to ease to more
sustainable levels of US$8.2-8.4/bbl for 2016-17F, down from
US$9/bbl in 2015 when it was driven by an abnormally high
crack spread for gasoline in 2015. Nonetheless, without huge
inventory losses, its accounting GRM is expected to increase
from US$5.7/bbl in 2015 to US$8.4/bbl in 2016F. This will
offset the lower utilisation of its refinery caused by planned
maintenance shutdown.
Preferred oil refiner in Thai market. Preferred oil refiner in Thai market. Preferred oil refiner in Thai market. Preferred oil refiner in Thai market. BCP remains our preferred
proxy for Thailand’s refinery space because of its diversification
into marketing and power, which generate more stable
income than the oil refinery business and local peers. The stock
is now trading at a deep discount to regional peers, at only
6.6x 2016 P/E with attractive dividend yields of >6%. Valuation:
BCP’s valuation is undemanding at 6.6x 2016 PE, compared
with 10x average for regional peers. We also expect the
company to maintain its dividend yield of >6% in the next two
years. We rate the stock a BUY with a sum-of-parts TP of Bt39,
comprising Bt30 for the refinery and Bt9 for the solar business. Key Risks to Our View:
Volatile oil price is the key risk Volatile oil price is the key risk Volatile oil price is the key risk Volatile oil price is the key risk
Refiners’ earnings are volatile because of inventory gains/losses
following changes in crude oil prices each quarter. BCP
mitigates this volatility by hedging and has a good track
record. BCP has a policy of hedging up to 30% of its output. At A Glance Issued Capital (m shrs) 1,377
Mkt. Cap (Btm/US$m) 41,308 / 1,156
Major Shareholders (%)
PTT 27.2
Ministry of Finance 10.0
Thai NVDR 4.6
Free Float (%) 62.7
3m Avg. Daily Val (US$m) 3.3
ICB IndustryICB IndustryICB IndustryICB Industry : Oil & Gas / Oil & Gas Producers
DBS Group Research . Equity
24 Feb 2016
Thailand Company Guide
Bangchak Petroleum Pcl Version | Bloomberg: BCP TB | Reuters: BCP.BK Refer to important disclosures at the end of this report
78
98
118
138
158
178
198
218
19.3
24.3
29.3
34.3
39.3
Feb-12 Feb-13 Feb-14 Feb-15 Feb-16
Relative IndexBt
Bangchak Petroleum Pcl (LHS) Relative SET INDEX (RHS)
Page 48
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Page 2
Company Guide
Bangchak Petroleum Pcl
WHAT’S NEW
Profit remained healthy in 2015 despite extra losses
Profit surged in 2015 despite a loss in 4Q.Profit surged in 2015 despite a loss in 4Q.Profit surged in 2015 despite a loss in 4Q.Profit surged in 2015 despite a loss in 4Q. BCP’s net loss of
Bt112m was slightly better than expected due to lower-than-
expected impairment charge for its E&P business of only
Bt70m. The full-year net profit of Bt4.2bn represents a sharp
increase from Bt696m in 2014. This included the impact of
inventory loss of Bt4.4bn in 2015, vs. Bt5.5bn in 2014.
Normalised net profit, excluding inventory gain/loss,
impairment charges and FX gain/loss, surged 74% y-o-y in
2015, thanks to the higher utilisation rate of its refinery and
strong market gross refining margin (GRM). Nonetheless, this
was slightly below our expectation due to higher-than-
expected finance cost.
Strong market GRM recorded in 2015.Strong market GRM recorded in 2015.Strong market GRM recorded in 2015.Strong market GRM recorded in 2015. Market GRM
increased slightly from US$7.90/bbl in 3Q15 to US$7.98/bbl
in 4Q15 on better crack spread for middle distillate products
(diesel and jet fuel), up from US$10.8/bbl in 3Q15 to
US$13.7/bbl in 4Q15. Nonetheless, this was offset by wider
product spread between light and heavy crude oil, which
caused higher crude premium for BCP. Also, the business had
to book an inventory loss of US$4.3/bbl and hedging loss of
US$0.9/bbl, hence accounting GRM was recorded at only
US$2.78/bbl in 4Q15, down from US$4.07/bbl in 3Q15. The
market GRM for 2015 was impressive at US$9.05/bbl, vs.
US$6.96/bbl in 2014. Netting of the impact from inventory
loss and hedging loss, the accounting GRM has more than
doubled y-o-y to US$5.65/bbl, supported by favourable
market conditions, especially for gasoline, and higher crude
run at 94% in 2015 vs 72% in 2014.
Marketing business benefited from low oil priceMarketing business benefited from low oil priceMarketing business benefited from low oil priceMarketing business benefited from low oil pricessss.... Lower oil
prices were positive for BCP’s marketing margin for 2015,
with this margin increased from Bt0.71/litre in 2014 to
Bt0.76/litre in 2015, especially in 4Q15 when the margin
spiked to Bt0.9/litre. Coupled with higher sales volume (+8%
y-o-y), the operating profit of the segment rose 10% y-o-y.
Performance of solar power business exceedPerformance of solar power business exceedPerformance of solar power business exceedPerformance of solar power business exceedssss target.target.target.target. Solar
power business’ EBITDA improved 17% y-o-y to Bt3bn in
2015, thanks to favourable output (+14% y-o-y). This has
exceeded the company’s target EBITDA of Bt2.4bn for the
year. The business has proved to be a stable source of cash to
the company since 2014 when most of its solar power
capacity has been in operation. Note that 2015 was the first
year of full operation of BCP’s total 118MW capacity in
Thailand. Nonetheless, with the better performance of oil
refinery, EBITDA contribution of the solar power business to
the group plunged from 50% in 2014 to 27% in 2015.
Outlook for 2016.Outlook for 2016.Outlook for 2016.Outlook for 2016. Strong earnings growth is expected for
2016. Despite the sharp increase in 2015F net profit, we still
expect to see an increase of net profit in 2016F by 36% y-o-y
on the absence of inventory losses and impairment charges.
The absence of the latter will continue to be the key earnings
driver in 2016F if oil prices continue to decline. Our forecast
has already taken into account the major turnaround in
2Q16. We estimate the crude run to decline from 105kbd in
2015 to 95kbd in 2016. We estimate market GRM to remain
strong at US$8.4/bbl, though slightly lower than US$9/bbl in
Net Profit Margins (5.5) 1.2 (0.3) Source of all data: Company, DBS Vickers
Page 49
ASIAN INSIGHTS VICKERS SECURITIES
Page 3
Company Guide
Bangchak Petroleum Pcl
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Crude run could decline on maintenance shutdown. Crude run could decline on maintenance shutdown. Crude run could decline on maintenance shutdown. Crude run could decline on maintenance shutdown. BCP’s
crude run in 2015 was at its record, at 113kbd (94% utilisation
rate) compared to its average of 87kbd (73% utilisation) in the
past five years. The higher crude run was driven by the new
crude distillate unit (CDU), which was installed in 2014 to
replace the one damaged by fire in 2012. The new CDU
increases BCP’s crude distillation capacity by 20kbd to 140kbd.
BCP has optimised crude run to capture favourable GRM in
2015. Nonetheless, we expect its crude run to decline to only
95kbd in 2016F due to planned maintenance shutdown in
2Q16. Our assumption for 2017 crude run is still conservative,
compared with 2015. As GRM could ease from 2015, we
believe there will be less incentive to maintain the high crude
run.
GRM has peaked in 2015GRM has peaked in 2015GRM has peaked in 2015GRM has peaked in 2015,,,, with normaliwith normaliwith normaliwith normalissssed US$8.2ed US$8.2ed US$8.2ed US$8.2----8.4/bbl 8.4/bbl 8.4/bbl 8.4/bbl
expected for 2016expected for 2016expected for 2016expected for 2016----17. 17. 17. 17. Our 2016 GRM assumption remains
conservative at US$8.4/bbl, compared with US$9/bbl in 2015.
There would be some inventory loss in 2016 if crude oil prices
continue to ease, especially in 1H16. We expect GRM to be
somewhat affected by the capacity additions in the region,
especially for middle distillate products.
Oil marketing business wOil marketing business wOil marketing business wOil marketing business willillillill continue to benefit from low oil continue to benefit from low oil continue to benefit from low oil continue to benefit from low oil
pricepricepricepricessss.... BCP’s marketing margins should be sustainable at
Bt0.7/litre after registering strong Bt0.76/litre in 2015, following
the sharp decline in oil prices as well as energy price
deregulation and restructuring in Thailand. The outlook for
BCP’s marketing business is solid, given its strong foothold in
the retail oil market (with the second largest market share after
PTT). Stable earnings from the marketing business will be able
to offset volatile profits from the oil refining segment.
More solar capacity to be added into portfolio.More solar capacity to be added into portfolio.More solar capacity to be added into portfolio.More solar capacity to be added into portfolio. The capacity of
BCP’s solar farms will continue to increase after the company
acquired SunEdison Japan with incremental capacity of 198MW.
Only 13MW was in operation currently, with 27MW more
under construction and coming onstream during 2016-17. We
assume only 13MW additional capacity in our earnings forecast.
Management is keen on expanding the total capacity of the
renewable power business to 500MW by 2020, including solar
farms and a geothermal power plant in Indonesia.
EBITDA contribution from solar business wEBITDA contribution from solar business wEBITDA contribution from solar business wEBITDA contribution from solar business willillillill gradually increase gradually increase gradually increase gradually increase
from new capacity in Japan.from new capacity in Japan.from new capacity in Japan.from new capacity in Japan. We estimate the EBITDA
contribution from the solar business will be steady at Bt2.9bn
p.a. for the next three years. This will account for 21% of 2016-
17F group EBITDA. The EBITDA contribution from the solar
power business will gradually increase when new capacity of
the business in Japan comes online in 2016.
Crude run (kbd)
Base GRM (US$/bbl)
Marketing margin (Bt/litre)
Total capacity - Solar (MW) YE
EBITDA contribution - Solar (Bt, mn)
Source: Company, DBS Vickers
99
86
113
95
105
0
14
29
43
57
71
86
100
114
2013A 2014A 2015A 2016F 2017F
5.88
6.96
9.058.4 8.24
0.00
1.85
3.69
5.54
7.38
9.23
2013A 2014A 2015A 2016F 2017F
0.52
0.710.76
0.7 0.7
0.00
0.16
0.31
0.47
0.62
0.78
2013A 2014A 2015A 2016F 2017F
70
118 118
131 131
0
17
33
50
66
83
99
116
132
2013A 2014A 2015A 2016F 2017F
1,388
2,572
3,005 2,928 2,928
0
600
1,200
1,800
2,400
3,000
2013A 2014A 2015A 2016F 2017F
Page 50
ASIAN INSIGHTS VICKERS SECURITIES
Company Guide
Bangchak Petroleum Pcl
Balance Sheet:
Improving financials.Improving financials.Improving financials.Improving financials. BCP’s financial position is expected to
improve gradually, as its D/E ratio drops from 0.9x to 0.6x by
2017, driven by continuous profit growth – thanks to stable
earnings from the marketing and solar power businesses. Asset
turnover could dip in 2016 following a 46-day planned
maintenance shutdown to further improve refinery efficiency
under its 3E (Efficiency, Energy and Environment) improvement
programme. The programme will be implemented over the next
three years up to 2018, when its refinery is upgraded to one of
the most complex in Thailand.
Share Price Drivers:
Attractive Attractive Attractive Attractive valuation and yield.valuation and yield.valuation and yield.valuation and yield. BCP is trading at less than 7x P/E
based on forecast earnings for the next three years, compared
with >10x for regional peers. And the stock offers good
dividend yields of >5% over the same period. This could attract
investors who are looking for beneficiaries of rising oil demand
in the domestic market amid the current oil price weakness.
BCP’s profit will be less volatile than that of oil refineries which
do not have retail outlets. The stable cash flow from its solar
business could also cushion the impact of volatile oil prices.
Recurring income from alternative energy business.Recurring income from alternative energy business.Recurring income from alternative energy business.Recurring income from alternative energy business. BCP plans
to consolidate its stakes in alternative energy businesses under
new subsidiary, BCPG. Management plans to list this subsidiary
on the stock exchange by 4Q16 to unlock the value of BCP’s
power business, which is overlooked by the market.
Key Risks:
Earnings exposed to crude oil volatility. Earnings exposed to crude oil volatility. Earnings exposed to crude oil volatility. Earnings exposed to crude oil volatility. Refiners’ earnings are
volatile due to inventory gains/losses following changes in
crude oil prices each quarter. BCP mitigates the volatility by
hedging and has a good track record, booking hedging gains
over the past seven quarters. The company has a policy of
hedging up to 30% of its output. Another risk is impairment
charge of its E&P business if oil price continues its downward
trend.
Company Background
BCP operates a 120-kbd oil refinery located in Bangkok. Its
refined oil products are distributed via petrol stations under its
retail marketing segment. BCP also invests in alternative
Where we differ:Where we differ:Where we differ:Where we differ: We are optimistic on product spread Analyst Chaipat THANAWATTANO +66 2657 7827 [email protected]
What’s New • Strong earnings growth in 2015 but below
estimate on impairments
• Generous 62% dividend payout announced
• Earnings growth will remain favourable in 2016F
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((BtBtBtBt m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Source of all data: Company, DBS Vickers, Bloomberg Finance L.P
Valuation remains attractive BUY maintained with TP of Bt70.BUY maintained with TP of Bt70.BUY maintained with TP of Bt70.BUY maintained with TP of Bt70. We maintain our BUY rating
on PTTGC and TP of Bt70, based on 1.3x PBV (2016F). The
company’s 2015 net profit growth of 33% y-o-y, though
below our expectation, displayed its resilience in the face of
weakening oil prices. Nonetheless, its share price has
underperformed its local peers during the past three months,
which still offers opportunities to accumulate the stock, in our
view.
Balancing feedstock under MTP Retrofit.Balancing feedstock under MTP Retrofit.Balancing feedstock under MTP Retrofit.Balancing feedstock under MTP Retrofit. Depleting gas
feedstock in the Gulf of Thailand has prompted the company
to adjust production to reduce reliance on gas feedstock. This
issue has been one of the key concerns among investors about
PTTGC’s business outlook in the medium term. A concrete
plan will be drawn up shortly under the Map Ta Phut Retrofit
Configuration, which will allow the company to increase
naphtha proportion from 9% currently to >30%.
Weaker oil priceWeaker oil priceWeaker oil priceWeaker oil pricessss could be key headwind. could be key headwind. could be key headwind. could be key headwind. The currently weak
oil prices will be a major headwind in 2016F. Nonetheless, at
the current level, we estimate that inventory losses should be
marginal. This should be offset by higher product spreads for
aromatics and strong spread for olefins. We revise down profit
forecasts for 2016-17F by 8-10%. Valuation:
PTTGC is among the cheapest petrochemical plays in the
region at 8.5x 2016F PE, compared with 14x average for peers.
Despite lower oil prices, its gas-based olefin cracker will remain
more competitive than naphtha-based players in the region. Key Risks to Our View:
Further weakening Further weakening Further weakening Further weakening of of of of oil priceoil priceoil priceoil pricessss.... PTTGC’s refinery business
could be impacted by more stock losses if oil price weakens
further from the current level, though we see limited
downside. This will also depress petrochemical prices and
product spreads. Depleting gas supply in the Gulf of Thailand
could also pose downside risk to the petrochemical business. At A Glance Issued Capital (m shrs) 4,460
Mkt. Cap (Btm/US$m) 239,741 / 6,733
Major Shareholders (%)
PTT Pcl 48.9
Thai NVDR 8.0
State Street Bank Europe Limited 3.0
Free Float (%) 51.1
3m Avg. Daily Val (US$m) 21.0
ICB IndustryICB IndustryICB IndustryICB Industry : Oil & Gas / Oil & Gas Producers
DBS Group Research . Equity
19 Feb 2016
Thailand Company Guide
PTT Global Chemical Version | Bloomberg: PTTGC TB | Reuters: PTTGC.BK Refer to important disclosures at the end of this report
46
66
86
106
126
146
166
186
206
40.5
45.5
50.5
55.5
60.5
65.5
70.5
75.5
80.5
85.5
Feb-12 Feb-13 Feb-14 Feb-15 Feb-16
Relative IndexBt
PTT Global Chemical (LHS) Relative SET INDEX (RHS)
growth of 288% q-o-q in 4Q15 to Bt4.7bn. This also turned
around from a net loss of Bt4.8bn in 4Q14. Full-year profit for
2015 also increased 33% y-o-y to Bt20.5bn. Nonetheless, this
was lower than our estimate on the impairment charge of
Bt2.5bn for its bio-chemical business in the US, given that the
plant could not be operated at full capacity as expected when
PTTGC acquired this asset in 2013. This was offset largely by
gains from inventory hedging of Bt2.6bn during the quarter.
Operating profit (normalised EBIT) improved 25% q-o-q but
declined by 8.9% y-o-y in 4Q15 and 3.8% y-o-y in 2015.
Olefins EBITDA margin weakened to 22% in 4Q15.Olefins EBITDA margin weakened to 22% in 4Q15.Olefins EBITDA margin weakened to 22% in 4Q15.Olefins EBITDA margin weakened to 22% in 4Q15. Weaker
product prices, mainly HDPE and LDPE, have sent EBITDA
margin of olefins segment down from 24% in 3Q15 to 22%
in 4Q15, the second lowest in 2015. The drop in the
utilisation rate of polyethylene (PE) plants to 103% in 4Q15
vs. 113% in 3Q15 was also behind the slide in EBITDA
margin. The operating performance of this segment for 2015
declined 20.3% y-o-y, with EBITDA of Bt26.6bn. But this still
accounted for 56% of total EBITDA in 2015, although EBITDA
margin softened from 26% in 2014 to 24% in 2015 and
sales volume of PE fell 2.3% y-o-y.
Oil refining business.Oil refining business.Oil refining business.Oil refining business. The oil refining segment turned around
from s net loss of Bt3.2bn in 2014 to a profit of Bt8.1bn in
2015 as a result of lower inventory loss and more gains from
inventory hedging. Market GRM also improved from
US$4.42/bbl in 2014 to US$5.45/bbl in 2015, thanks to
higher crack spread for light distillate products, including
naphtha used as gasoline blend. This was offset somewhat by
lower crack spread for middle distillate products, mainly
diesel. Contribution to total EBITDA improved sharply from
negative contribution to 22%.
Aromatics segment improved from better margin.Aromatics segment improved from better margin.Aromatics segment improved from better margin.Aromatics segment improved from better margin. The
aromatics segment also returned to the black in 2015 with a
net profit of Bt1.4bn, vs. a net loss of Bt5.4bn in 2014. This
was driven by better product spread, as a result of lower
condensate price (that tracks Dubai crude oil price) while
Paraxylene price declined at a slower pace. Nonetheless,
utilisation rate fell from 81% in 2014 to 74% in 2015 due to
an unplanned shutdown at one of its aromatic units. EBITDA
contribution remained small at 11% in 2015, though much
better than the negative contribution in 2014.
Dividend payout was generous at 62%. Dividend payout was generous at 62%. Dividend payout was generous at 62%. Dividend payout was generous at 62%. The company
announced a final dividend of Bt1.30/share, bringing the full-
year dividend to Bt2.80/share. This implies a 62% payout
ratio and dividend yield of 4.7% on the average share price
for 2015. This was in line with our expectation that the
company will compensate to shareholders for an
underperforming share price during the past 12 months.
Outlook for 2016. Outlook for 2016. Outlook for 2016. Outlook for 2016. We expect the olefins segment to remain
in the driver’s seat in 2016F due to stable gas flow from PTT,
which will enable the company to operate its olefins crackers
at >90%. We also think that product prices and spreads
should remain healthy on balanced demand/supply.
Nonetheless, we believe that the gas price adjustment in
2Q16 should be in PTTGC’s favour, based on the netback
formula for feedstock supplied by PTT. With more stable oil
prices, we do not expect another huge inventory loss in 2016,
PricePricePricePriceRat ing Rat ing Rat ing Rat ing
1: 17 Feb 15 58.25 62.00 HOLD
2: 24 Jul 15 61.00 75.00 BUY
3: 10 Aug 15 60.50 75.00 BUY
4: 20 Aug 15 55.25 75.00 BUY
5: 10 Nov 15 55.25 70.00 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
34
5
42.75
47.75
52.75
57.75
62.75
67.75
72.75
Feb-15 Jun-15 Oct-15 Feb-16
BtBtBtBt
Page 61
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:BC
BUYBUYBUYBUY
Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM1.80 (KLCIKLCIKLCIKLCI : : : : 1,724.29) Price Target :Price Target :Price Target :Price Target : RM2.10 (17% upside) (Prev RM2.15) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Recovery in crude oil prices Where we differWhere we differWhere we differWhere we differ:::: Our forecast as compared to consensus are more conversative on the expectation that driling and energy segment will continue to be affected for longer term.
Forecasts and Valuation FY FY FY FY JanJanJanJan ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Best proxy to oil Best proxy to oil Best proxy to oil Best proxy to oil recoveryrecoveryrecoveryrecovery
We favor SapuraKencana (SAKP) as our big cap play given its
position as a global integrated upstream company which has
operations stretched across the entire O&G value chain. In addition
to that, SAKP stand out as the best candidate to benefit from oil
price recovery in 2017 given its direct exposure to exploration and
production segment. SAKP’s solid RM21bn orderbook will provides
good earnings visibility until 2020 due to the long-term fixed
contracts. Of the total orderbook, 70% (RM15bn) is for
engineering and construction (E&C)’s international business,
mainly for the supply and operation of six pipe-lay support vessels
(PLSVs) to Petrobras. Drilling and Energy segment constitute 11%
each of the orderbook, while remaining 8% is for E&C Malaysia.
SSSStrong trong trong trong oil oil oil oil productionproductionproductionproduction. . . . With management’s new guidance on its
production profile, we are looking at 4.1m boe for FY17 and 4m
boe for FY18. The decline in production profile is expected to be
minimal due to new discoveries by the group.
FY17FY17FY17FY17––––18F earnings cut by 41% and 40%18F earnings cut by 41% and 40%18F earnings cut by 41% and 40%18F earnings cut by 41% and 40%. We cut our FY17–18F
by 41% and 40% to account for: (i) lower Brent crude oil price
assumption of US$40/barrel and US$45/barrel for FY17 and FY18
respectively from previous assumption; (ii) new production
guidance for Newfield assets; (iii) lower segmental revenue and
margins across the board. However, this was partially offset by our
higher USDMYR assumption.
Valuation: We maintain our BUY recommendation on SAKP with a slightly
lower target price of RM2.10 based on SOP valuation. We continue
to like SAKP given its strategic business positioning which span
across O&G value chain and undemanding PE valuation at -1SD.
Engineering & Construction (E&C): Engineering & Construction (E&C): Engineering & Construction (E&C): Engineering & Construction (E&C): Segment revenue increased
8.1% y-o-y to RM5,646m on the back of better performance
from international projects. Core PBT margin (exclude
impairments) improved 9% y-o-y from 17.7% to 19.3%.
Drilling:Drilling:Drilling:Drilling: Drilling revenue rose 7.9% y-o-y to RM2,955.8m
driven by stronger US dollar coupled with full year maiden
contribution from new assets. Core PBT margin was relatively
flat at 21.1% from 20.9% last year.
Energy. Energy. Energy. Energy. The Energy division took a dive, reporting 25.7% y-o-y
decline in revenue to RM1,600m impacted by lower average
realised price per barrel and barrels of oil lifted. Core PBT
margin fell from 19.1% to 7.3%.
FY17FY17FY17FY17––––18F earnings cut by 41% and 40%18F earnings cut by 41% and 40%18F earnings cut by 41% and 40%18F earnings cut by 41% and 40%. We cut our FY17–
18F earnings by 41% and 40% by taking into account (i) lower
Brent crude oil price assumption of US$40/barrel and
US$45/barrel for FY17 and FY18 respectively; (ii) new
production guidance for newfield assets; (iii) lower segmental
revenue and margins across the board. However, this was
partially offset by our higher USDMYR assumption. We have
also introduced FY19F earnings of RM850m which implies
11% growth y-o-y.
Salient points
1. SAKP has put through a series of impairments in FY16
amounting to RM2bn; impairments can be broken down to
RM1.4bn related to O&G Energy assets, RM400m for SKD
drilling assets and RM203m for its E&C segment. The net of
tax impact for the impairments amounts to RM1.7bn.
2. Petrobras PLSVs (Sapura Diamante, Topazio, Onix and Jade)
are currently running on optimal utilisation of 99%. The
remaining two - Sapura Esmerald and Rubi PLSVs - are
expected to be delivered by 2Q and 3Q this year.
Management also highlighted investors’ concerns on
Petrobras, and reassured us that Petrobras has been paying
within 30 days of invoicing.
3. There are currently two tender rigs and three semi tender
rigs that are cold stacked. Management stated that in the
event that crude prices recover and demand returns, it
would take less than one month to get the stacked rigs back
into operation. Contracts for another five rigs will expire in
FY17.
4. Energy division lifted 4.8m boe in FY16 at an average lifting
price of US$52/barrel as compared to 5.1m boe in FY15
with higher lifting price of US$94/barrel. Management is
targeting 4.1m boe for FY17 and 4m boe for FY18.
5. Capex for 2017 would be kept at a minimum, focusing
mainly on maintenance. We expect the level to be similar to
2016’s level of RM700m.
6. On concerns whether further impairments are necessary and
expected, management guided that this would depend on
the latest price outlook by its independent reserve auditor.
Valuation and recommendation
Maintain Maintain Maintain Maintain BBBBUY UY UY UY with lower TP of RM2.10. with lower TP of RM2.10. with lower TP of RM2.10. with lower TP of RM2.10. Despite the earnings
downgrade, we continue to maintain our Buy
recommendation at a lower RM2.10 TP (from RM2.15
previously). We lowered our SOP-based TP by a lower
magnitude as compared to our earnings cut as we accorded
higher USDMYR and Brent crude oil price assumptions in our
DCF calculations which mitigated the impact of earnings cut.
Current PE valuation at -1SD below historical mean appear
compelling. We continue to like SAKP given its strategic
business positioning which span across O&G value chain.
Net ProfitNet ProfitNet ProfitNet Profit 257257257257 130130130130 (1,286)(1,286)(1,286)(1,286) nmnmnmnm nmnmnmnm
Net profit bef Except. 193 250 (136) nm nm
EBITDA 727 916 47.6 (93.5) (94.8)
Margins (%)
Opg Profit Margins 27.9 29.4 21.3
Net Profit Margins 10.7 4.5 (57.6)
Source of all data: Company, AllianceDBS Research
Page 64
ASIAN INSIGHTS VICKERS SECURITIES
Company Guide
SapuraKencana Petroleum
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
TenderbTenderbTenderbTenderbook activity ook activity ook activity ook activity –––– estimated at RM28estimated at RM28estimated at RM28estimated at RM28bnbnbnbn (US$7bn)(US$7bn)(US$7bn)(US$7bn)
SAKP currently has US$7bn of new tenders out in the market;
49% of works tendered for are currently in Asia Pacific, with
India as the second largest market at 22%. Other regions
include America (17%) and Middle East/Africa (12%). In order
to maintain a stable orderbook of RM20-25bn, SAKP has to
secure about RM5bn of new orders per annum. SAKP had
secured RM6.2bn worth of new contracts in FY16.
Crude oil prices. Crude oil prices. Crude oil prices. Crude oil prices. For FY17F, we have assumed an average crude
oil selling price (ASP) of US$40/barrel Brent. For FY18-19F, we
have imputed a slight improvement in crude oil prices to
US$45/barrel and US$60/barrel respectively. This view stems
from assumptions of stabilisation in the market as well as some
improvement in demand. For every USD5/barrel change
in crude oil ASP, we estimate the earnings impact to the group
is 7% and therefore, any gains in crude oil price is a major
positive for SAKP. To note, SAKP’s breakeven EBITDA cost is
weakness into FY17-FY18, there would be downside to
earnings. Furthermore, weak contracting activity in the market
could result in increased idle time for core assets like derrick lay
vessels and tender drilling rigs.
Sum of parts valuation
SegmentSegmentSegmentSegment RM mRM mRM mRM m ValuationValuationValuationValuation OCSS 9,120.8 FY17F, 13x PE FAB & HUC 4,462.2 FY17F, 13x PE Drilling 6,667.9 FY17F, 13x PE EJV 8,709.4 DCF Net Debt (16,414.8)
earnings impact for every USD5/barrel change in crude oil
prices.
PETRONAS capex and opex cuts. PETRONAS capex and opex cuts. PETRONAS capex and opex cuts. PETRONAS capex and opex cuts. This will have an impact on
SAKP’s future Malaysian contract wins and potentially slow the
rollout of work orders for the group’s existing Pan Malaysian
contracts for installation and hook-up and commissioning.
Further to this, we expect charter rates for some assets like
offshore support vessels and tender rigs chartered to
PETRONAS to see lower revised rates going forward.
Petrobras and prePetrobras and prePetrobras and prePetrobras and pre----salt devesalt devesalt devesalt developmentslopmentslopmentslopments.... SAKP is heavily
entrenched in the Brazilian pre-salt market from its RM12bn
contract to supply six pipe-laying support vessels (PLSV) to
Petrobras by end-FY17. These contracts are being carried out
via a 50:50 joint venture with Seadrill for a fixed term of 5-8
years and with extensions of up to 5-8 years. The daily charter
rate for the vessels works out to be US$250-265k/day and
SAKP notes that payments from Petrobras have been on time
despite ongoing corruption investigations and cuts to its
investment budgets. That said, we continue to watch
developments on this contract. By FY18, contributions from all
six vessels could be fairly significant at almost 15% of group
net profit.
Company Background
SapuraKencana Petroleum Bhd provides offshore development
drilling and pipe-laying services as well as engineering,
procurement, construction, installation and commissioning
services. The company also owns upstream assets with
188mmboe of reserves and resources of which 84% consist of
PricePricePricePriceRat ing Rat ing Rat ing Rat ing
1: 12 May 15 2.73 2.55 HOLD
2: 16 Jun 15 2.40 2.55 HOLD
3: 17 Sep 15 2.00 2.15 BUY
4: 26 Oct 15 2.12 2.15 BUY
5: 16 Nov 15 2.08 2.15 BUY
6: 11 Jan 16 1.80 2.15 BUY
7: 18 Jan 16 1.66 2.15 BUY
8: 25 Jan 16 1.62 2.15 BUY
9: 01 Feb 16 1.88 2.15 BUY
10: 10 Feb 16 1.79 2.15 BUY
11: 15 Feb 16 1.83 2.15 BUY
12: 22 Feb 16 1.97 2.15 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
56
7
89
10
11
12
1.39
1.59
1.79
1.99
2.19
2.39
2.59
2.79
2.99
Apr-15 Aug-15 Dec-15 Apr-16
RMRMRMRM
Page 69
Industry Focus
Oil and Gas
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 20 April 2016 the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have proprietary positions
in Keppel Corporation, Sembcorp Marine, Sembcorp Industries, Yangzijiang Shipbuilding, Cosco Corporation, Ezion Holdings, Ezra Holdings, Baker Technology, Triyards Holdings, The Bangchak Petroleum, IRPC Pcl, PTT, PTT Exploration & Production, PTT Global Chemical, Thai Oil PCL as of 31 Mar 2016.
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2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3.
Compensation for investment banking services: DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from EMAS Offshore Ltd, Keppel Corporation, Ezra Holdings as of 31 Mar 2016.
DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Ezra Holdings in the past 12 months, as of 31 Jan 2016. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
4. Directorship/trustee interests: Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of Keppel Corporation as of 28 Feb 2015.
RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.
Dubai
This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s)
named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Bank Ltd.
12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888
