Investment Highlight

• Global upstream spend to rise 68% this year. Westwood Global Energy Group’s Global Offshore Rig Market Report indicated that offshore investment bounced back in 2021 and recovered to pre-pandemic levels, which augurs well for the offshore drilling industry. Engineering, procurement, and construction (EPC) spend surged 200% YoY to US$41.7bil in 2021, with the last quarter recording US$8bil. The energy consultant projected that 2022 could accelerate further by 68% YoY to US$70bil, the highest since 2013, with annual EPC spend from 2022–25 averaging at US$57bil annually (Exhibit 7).
  40% of the 2022 upstream EPC spending stems from high-profile projects such as Saudi Aramco’s North Dome and Qatar Energy’s North fields in the Middle East, Petrobras’ Buzios, BHP’s Perdido and ExxonMobil’s Yellowtail in Latin America, Equinor’s Wisting and Aker BP/Equinor’s NOAKA in the North Sea, and PetroVietnam’s Block B in Southeast Asia.
• Steady improvement in global rig utilisation. Global jackup fleet utilisation showed a small but steady climb throughout 2021, from 76% marketed utilisation in 1Q2021 to 81% in 4Q2021. Global semi-submersible rig utilisation had rebounded until the last few months of 2021. Despite a sharp supply contraction since early 2020, semi-submersible demand likewise fell, translating to a weak marketed utilisation of 64% in December 2021. This is much lower than that of the drillship fleet, which averaged 75% in 4Q2021, up 10% points YoY.
• Rig attrition to rise. Rig attrition in 2021 was at its lowest level since 2014, with just 33 rigs removed from the fleet, far below the 46 units taken out of service in 2020. However, with 66 cold-stacked jackups still in the fleet, the attrition rate could rise as Westwood expects more units to be taken out of service as new rig deliveries remain dormant.

• South America in even better rig shape. Several major drilling regions appeared to have weathered the Covid storm with little fallout last year, while other markets suffered significantly. Drilling demand in North America, South America and the Middle East has remained strong since 2019 and exited 2021 in good shape while South America was in even better shape.
  Offshore drilling in the North Sea, Africa and Southeast Asia has tumbled, with demand on a downward trajectory since the start of 2020 and hitting rock bottom at the close of 2020. These regions have been on the road to recovery in 2021 with the North Sea and Southeast Asian rig markets likely to be back at pre-pandemic levels of rig demand this year. Nevertheless, Africa still has much to catch up.

• Southeast Asia in recovery. Offshore drilling demand in Southeast Asia and Australia plummeted in the last couple of years, falling 11% YoY to 15K rig days in 2020 and 3% YoY in 2021 (Exhibit 8). However, activity gained momentum in 2021 with a continued rise in demand towards the end of the year. Westwood forecasts this momentum to continue this year with 13K days of backlog and a considerable number of prospects in the pipeline, indicating the award of a substantial number of rig contracts in which Southeast Asia could account for the majority of outstanding jackup requirements globally. This could benefit jackup operators such as Velesto Energy and tender rig player Sapura Energy.

• Recovery in 4Q2021 order flows. The sector’s contract awards in 4Q2021 to Malaysian oil & gas operators rebounded 3.5x YoY to RM5.3bil, largely from a lumpy Pemex onshore contract award to a Coastal Contracts JV. Even so, major fabricators, still suffering from low margins and balance sheet constraints such as Sapura Energy, did not secure significant engineering, procurement and construction jobs.

• Maintain 2022–2032 oil price projection at US$70–75/barrel for now with Brent crude oil prices rising over US$90/barrel on receding worries that the Omicron variant pandemic could significantly dampen global demand. Meanwhile, supply shortfall risks are escalating with major oil exporting nations unable to ramp up production to pre-pandemic levels due to chronic under-investment over the past 5 years amid investors’ persistent energy transition-driven prerogatives.
  As US inventories have tumbled 17% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 416mil barrels presently (7% below the 2019 average of 448mil barrels), our price projection is in line with the EIA’s ShortTerm Energy Outlook of US$75/barrel for 2022 and US$68/barrel for 2023. Notwithstanding high global vaccination rates, we are cautious on the emergence of new vaccine-resistant viral variants, the possibility of Iranian crude re-entering global markets, rebound in US shale production and further relaxation of OPEC production quotas.

• Maintain OVERWEIGHT call as improved crude oil prices and rising global demand will catalyse faster order flows across the value chain. We continue to like Hibiscus Petroleum’s direct upstream exposure to higher crude oil prices and Dialog Group’s expanding, yet resilient non-cyclical tank terminal and maintenance-based earnings base.

Source: AmInvest Research - 7 Feb 2022