Published October 23, 2008

Analysts cautious of O&M sector, downgrade Keppel

Forecast drop in oil and gas prices could affect exploration, production spending

By OH BOON PING

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ANALYSTS have grown increasingly cautious on the offshore & marine (O&M) sector here, citing weaker fundamentals and slower orders momentum.

Slowdown ahead: Weaker oil prices, falling rig utilisation and day rates are negative for the offshore newbuild industry, says a Goldman Sachs report

Accordingly, the research houses downgraded Keppel Corp to 'neutral' rating.

In a report, Goldman Sachs said that the forecast drop in oil and gas prices could affect exploration and production spending, and force the drilling cycle into a cyclical weakness. 'Weaker oil prices, falling rigs' utilisations and day rates are negative for the offshore newbuild industry,' it said. Coupled with the credit market woes, this means that demand for newbuild orders would fall.

Indeed, CIMB-GK already sees signs of slower orders, pointing to Atwood Oceanics' recent decision not to exercise its option for a third semi-submersible with SembCorp Marine as an example.

'While we had expected orders to slow down even before the credit crisis, citing deliveries to meet shortages from 2009 onwards in the shallow-water jack-up rig and shipbuilding segments, it now looks like the credit turbulence could hasten the slowdown of orders going into 2009,' it said. And income growth beyond 2009 appears at risk if the order momentum decelerates faster than expected.

This comes as conditions in credit markets worsened following Lehman Brothers' collapse, while many economies look set to enter a prolonged phase of economic slowdown. A massive sell-down on equities had also caused O&M stocks to lose more than 70 per cent of their values in the year-to date.

Also, the industry may see more projects abandoned due to cost overruns from higher equipment costs and insufficient financing.

Said CIMB analyst Lim Siew Khee: 'We see more frantic sales of unchartered assets in the market where operators are pushing back their newbuild plans and starting to look for bargain units built for speculation. Norwegian MPF, which recently filed for bankruptcy protection, is the second casualty of the credit crisis this year, after US MPU Offshore Lift in July.'

Goldman felt that the sector is unlikely to outperform in the next 12 months and has cut its 2009 earnings estimates for Keppel, SembCorp Marine and SembCorp Industries.

Similarly, CIMB has reduced its order assumptions for 2009 to 2010 by 13-44 per cent for the stocks, and downgraded their profit forecast accordingly.

Both Goldman and CIMB downgraded Keppel to 'neutral', targeting prices of $6.70 and $6.10 respectively. The stock ended trading yesterday at $4.17.

SembCorp Marine remains a top pick for CIMB with a price target of $3 - against its closing price of $1.41 yesterday; while Cosco Corp is expected to underperform. CIMB valued Cosco at 85 cents, compared with its close of 70.5 cents yesterday.