Marine Sector Research Report

by DBS Group Research (20 Aug)

EARNINGS season in H1 2008 has reinforced positive outlook for rig builders, as well as oil and gas service and equipment suppliers. The rig builders, as well as oil and gas service and equipment players, have to-date delivered collectively stronger than expected H1 2008 report cards, underscoring their ability to ride on the positive sector outlook and protect profit margins despite raw material price concerns and weak US dollar.

Indeed, SGX-listed Singapore yards, and oil and gas service and equipment players' earnings have escaped the concerns earlier in the year unscathed; with new orders holding up, and ironically, US dollar rebounding and raw material price concerns easing recently. The exceptions were SGX-listed Chinese yards' earlier-than-expected dip in profit margins, which we had warned since mid-Q1 2008.

Undiscerning selldown in share prices in line with general market weakness has created buying opportunities. In our opinion, the earnings for most SGX-listed Singapore yards and oil and gas service and equipment suppliers have caught up with their share price valuations since early 2008, and the scenario has now reversed for the current depressed share prices to rebound, underpinned by the firm industry fundamentals and successful business execution.

Easing oil prices are positive for the durability of oil and gas industry up-cycle. We have repeatedly mentioned since last August that too high an oil price may result in demand destruction and harm the orderbook replenishment opportunities of stocks exposed to the booming offshore segment.

While the equity market sees the recent cooling off in crude oil price negatively, we are taking the view that the recent retracement in oil prices is reducing the risk of demand destruction and inflationary pressures. This is positive for more new order wins ahead.

This is also in line with rig builders' and oil and gas service and equipment suppliers' feedback that oil price at US$70 per barrel is a good level for their business outlook.

Sembcorp Marine is our top pick among the yards; with price catalyst coming from a possible record level of order wins this year and improving margins from successful execution of its record order book.

Swiber Holdings and Ezra Holding remain our top picks among the oil and gas service and equipment suppliers, as both companies have strong market positioning to ride on the increasing shift to production phases for offshore oil fields.

-Research Report by DBS Group Research (20 Aug)