• Accelerated peak oil outlook. We attended Rystad Energy’s Supply Chain webinar yesterday which was presented by its partner and head of Energy Service Research, Audin Martinsen, and his team of consultants. Martinsen views that the Covid-19 pandemic’s new normal has accelerated peak oil scenario with global demand now expected to reach 100mil barrels/day in late 2020s before flattening and begin a gradual decline by 2030 (Exhibit 2). Hence, he presented “The Suppliers’ Survival Guide” for service providers which emphasised the need to reposition for the energy transition wave.

• Long way to catch up to 2019 global upstream investments. Rystad expects that upstream investments have a long way to go before reaching the pre-Covid 2019 level. For the offshore segment, upstream investments will only reach this level in 2024, shale/tight oil in 2028 and other onshore activities in 2029 (Exhibit 3). All in, the pandemic has erased an estimated US$200bil in oilfield service purchases annually with a 29% YoY drop to US$400bil in 2020, which Rystad projects to subsequently increase by a slight 2% this year (Exhibit 4).

Even so, projects which have been sanctioned are expected to almost double YoY to US$170bil in 2022 (Exhibit 6), driven by the Middle East, Australia and Europe. From a global outlook, well-related services, modifications and operational spending are expected to perform better than EPCIC projects, which appears to be moving in a different trajectory to Petronas’ 3-year activity outlook (see our update on 4 January 2021).

• Suppliers beginning to diversify from upstream. Unlike the 2014–2016 down cycle when oil service providers subsequently increased investments in upstream during the short rally in 2018–2019, operators have begun to diversify from the sector with investment ratios expected to decline to 48% in 2021 from 63% in 2020. The drivers for the transition stems from rising CO2 costs, declining costs of renewable generation, oil substitutes such as hydrogen and carbon capture and storage (CCS) solutions, local air pollution regulations and government-driven climate initiatives against the backdrop of the viral pandemic.

Rystad estimates global spending on hydrogen to reach RM400bil in 2020–2035 vs CCS’ US$100bil while global renewable energy (RE) installations increase by 50% from 2020 to 2025. As this is expected to dilute investments in oil exploration and greenfield activities, Rystad advocates: 1) diversifying to stay resilient; 2) monetizing abatement opportunities such as electrification, CCS, reducing flaring, improving operational efficiency and digitalization; and, 3) embracing emerging adjacencies such as clean energy infrastructure (hydrogen value chain, energy storage and CCS) and renewable energy (wind, solar and geo-thermal) solutions.

• FPSOs to lead offshore recovery. Floating production, storage and offloading (FPSO) vessels are expected to lead the offshore recovery with 45 new vessels to be sanctioned over the next 5 years. This could lead to record highs in a backlog of leased FPSOs in 2022, triggering supply challenges with sole bidders for Petrobras’ recent tenders amid a limited number of operators. Brazil accounts for 12 or 71% of the 17 FPSOs to be sanctioned in 2021–2025. Similar to SBM Offshore, Modec and BW Offshore, FPSO operators may deploy their floater and mooring experience to develop offshore wind foundations. Recall that Yinson has an operational RE division from its US$30mil investment for a 95% equity stake in Rising Son Energy, which has a 140MW solar farm in Bhadla Solar Park Phase II, Rajasthan, India. Yinson also recently signed an agreement with listed NTPC to develop a 190MW plant in nearby nearby Nokh Solar Park.

• Subsea tree sanctioning to reach 2019 level. Rystad expects offshore greenfield sanctioning to gather pace and almost reach 2019 level of US$105bil by 2022, translating to 340 subsea tree awards vs. 270 trees in 2019 (Exhibit 12) due to backlogged projects last year. These projects have been impacted by fiscal policies in the host countries, such as the Norwegian government’s favourable temporary tax relief in early June this year to ramp up activity and safeguard jobs in the industry. However, Nigeria has instead increased royalties on deepwater projects in late 2019 that could derail upcoming projects.

• Wells drilled may not reach 2019 level over the next 5 years on cautious US shale. Global wells drilled and completed fell 35% YoY to 48K in 2020 and partly recover by 15% this year. While this will rise further to 65K in 2022, activities will remain relatively flat thereafter until 2025 (Exhibit 13). Hence, well-drilling operations are not expected to reach the 74K wells drilled in 2019 as Rystad expects US shale operators to be restrained in their capex rollouts to repay debt or reward shareholders amid an improved oil price environment in contrast with a more aggressive investment strategy back then. In our view, a more optimistic US drilling campaign could return from a supply squeeze given that the cuts in exploratory drilling since 2014 has caused an 80% drop in global discovered resources from 2010 to only 11mil barrels of oil equivalent last year.

• Flattish jack-up demand. Demand for global jack-up rigs are expected to remain flat YoY at 307 rigs in 2021, which still represent a 2% CACR decline from 2019. Excluding rigs being retired, Rystad expects utilization rates to remain flat at 69% in 2021–2022, and dip to 67% from new capacity additions in 2022 (Exhibit 15–16).

For premium jack-ups, day rates are expected to decline 8% YoY to US$66K on weak demand, thereafter recover by 12% to US$74K in 2022. Meanwhile, commodity jack-ups are expected to improve by 6% YoY to US$53K in 2021 and rebound by 26% to US$67K in 2022.

This means that the earnings prospects for Velesto Energy, which has a fleet of premium jack-up rigs currently chartered at US$66K with utilization rates of 50%, could remain unexciting over the next 2 quarters.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 HOLD. We recommend Yinson for its strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa. We also continue to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. Our other BUY calls are Sapura Energy, which has just completed its RM10bil debt restructuring package and re-positioned the formidable EPCIC group to secure fresh global orders; and Petronas Gas, which offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 31 Mar 2021