- We met up with 6 oil and gas (O&G) companies – Keppel Offshore & Marine, Sembcorp Marine, Marco Polo Marine, Cosco Corp, Yangzijiang Shipbuilding and Nam Cheong Ltd - in Singapore with fund managers last week. Overall, we remain convicted that the fundamentals of the sector are robust, although some degree of caution is warranted given the increasing presence of Chinabased yards gravitating towards this sector.

- Keppel’s yards in Singapore are presently busy with a record order book of S$13.1bil, and is unable to take any new jobs with deliveries before 2014. We noted that mostly jack-up rigs were under construction at the largest yard operator in Singapore. Management indicated a preference to take on orders for jack-up rigs, in which it has its proprietary designs and higher stabilised margins, as opposed to more complex semi-submersible rigs. But demand is increasing for jackup rigs with designs of higher specifications suited for deeper and harsher environment such as the North Sea and Norwegian Sea, coupled with more stringent safety standards.

- But for Sembcorp Marine, we noted that the group, which has a larger order book of S$14.6bil as compared to Keppel, prefers a more diversified order portfolio of jackups and semisubmersibles. The group’s new 73-hectare Phase 1 Tuas yard, which will focus on repairs for ultra-large ships, will commence operations soon. But SembMarine’s core operations in fabricating rigs and offshore structures will continue at the group’s existing Jurong yard; so there will be no significant disruption to its activities.

- Marco Polo Marine is a builder of offshore support vessels (OSVs) with a significant chartering operation in Indonesia. Owned by an Indonesia-born Chinese family, the group is positive on the rollout of projects in Indonesia with 20 offshore exploration blocks auctioned off last year, which will translate to a need for an estimated 80 OSVs. As there only 6 modern anchor handling tug supply (AHTS) vessels and 41 locally-flagged AHTS (under 15 years old) currently operating in Indonesia, there is huge pent-up demand given the country’s cabotage regime. Miri-based and SGX-listed Nam Cheong largely builds offshore vessels speculatively by outsourcing to 3 China-based yards. As the largest OSV builder in Malaysia, management expects to stay ahead of its peers by building vessels with the requisite specifications via hands-on rapport with its clients, building vessels with competitive edge even during down-cycles and providing authorisation letters for vessels under construction during tenders.

- Cosco Corp, which has an US$6bil order book largely derived from O&G, expects gross margins to remain between 8%-10% against the backdrop of intense competition from over 50 China-based yards. The group expects some consolidation amongst these yards, which have been starved of orders due to the ongoing dearth of orders from the dry bulk, tanker and container ship sectors. Yangzijiang Shipbuilding, which has been amongst the most profitable and well-run China-based shipyards, expect declining margins for FY13F-FY15F due to weak pricing fundamentals. But the group is making its foray into jackup fabrication cautiously as this represents a new sector for this privately-owned group.

- Our visit reaffirms our OVERWEIGHT call on the sector with 2Q2013 orders surging 3.8x QoQ to RM16bil from the umbrella hookup & commissioning contracts and Petrobras’ charter for 3 new flexible pipelay support vessels to SapuraKencana. In the short- to medium-term, excitement in the sector will still largely stem from the larger field projects in Malaysia such as the enhanced oil

recovery projects; gas cluster developments for the North Malay basin; as well as in Sabah and Sarawak which are tied to the completion of the Bintulu LNG complex expansion in 2015. Our top pick for the sector is SapuraKencana Petroleum while our other BUYs are Alam Maritim, Dialog Group and Petronas Gas.

Source: AmeSecurities