STX OSV (CIMB)

Signs of improvement in North Sea
OUTPERFORM Maintained
S$1.19 @14/06/11
Target: S$1.70
Offshore & Marine

• Gunning for stronger 2H. Faster-than-expected improvements in North Sea demand reaffirm our belief in a stronger order momentum for STX OSV in 2H11. The North Sea is an important yardstick for utilisation and day rates for the rest of the world. Also, while STX OSV’s longer-term growth is underpinned by booming Brazil demand, its near-term orders are backed by the North Sea. We believe the rebound is not merely seasonal, but signals a sustained recovery. Hence, STX OSV’s order momentum should strengthen in 2H to meet our FY11 order target of NOK10bn (excluding Transpetro orders), providing stock catalysts. No change to our earnings estimates or target price of S$1.70, based on 11x CY12 P/E (15% discount to rigbuilders’ 5-year mean).

• Stronger order flows than peers. YTD, STX OSV has secured NOK3.5bn of orders or 35% of our FY11 order target. It is second only to Eastern Shipbuilding’s Florida yard, with a 19% share of PSV global orders. We believe STX OSV could yet announce more orders before end-1H11. Furthermore, the NOK3bn Transpetro orders should be made effective in early 3Q11, following approval from Brazil’s Merchant Marine Fund.

• Yard to own. STX OSV remains our top pick among small-mid-cap industrials. Its positives are: 1) structural improvements in its operating performance; 2) its position to capture Brazil’s deepwater growth; and 3) a gross valuation-competence mismatch, in our view. Though clearly a league above local OSV builders, STX OSV is only trading in line with local OSV builders’ 5-year average.

Stronger order flows than peers
35% of order target met; Transpetro orders to be made effective in 3Q11. YTD, STX OSV has secured NOK3.5bn of orders or 35% of our FY11 order target of NOK10bn (excluding Transpetro orders). Orders are mostly from established North Sea OSV operators, the company’s main clients. Larger-capacity PSVs (4,000 dwt and above) continue to dominate orders as there is genuine demand for fuel and operational efficiency.

2Q11 orders of NOK2.3bn have already surpassed 1Q11’s NOK1.2bn. We believe STX OSV could yet announce more orders before the end of 1H11. Lastly, its NOK3bn Transpetro orders should be made effective in early 3Q11, following approval from Brazil’s Merchant Marine Fund.

Ahead of the pack in terms of orders. Up until May 11, ODS-Petrodata had reported 27 PSV and five AHTS orders globally. North Sea builders (and STX OSV’s peers) such as Kleven Maritime and the Bergen Group continue to benefit from demand for large PSVs. STX OSV is second only to Eastern Shipbuilding’s Florida yard, securing a 19% share of PSV global orders. Eastern Shipbuilding’s orders were boosted by a package of five 4,000 dwt PSV orders from Brazilian vessel owner, Boldini S.A as it leverages the US Maritime Administration (MARAD) for the financing of US builtvessels. These vessels would most likely be chartered to Petrobras. In the meantime, low-end AHTS orders have been trickling down to Chinese yards.

North Sea improvements
Sharp bounce back. After a typical lull in 4Q10 (due to the winter season), the North Sea OSV market has bounced back sharply as booming Brazil continues to attract vessels out of the overcrowded market; while increased fixtures have been keeping vessels busy. To illustrate, Solstad Offshore is one of the latest vessel owners to have secured four years of firm orders plus 4-year options from Petrobras. In addition, notable requirements such as Cairn Energy’s summer drilling programme in Greenland; the Allseas pipeline programme as well as BP’s construction programme have soaked up excess capacity. As a result, the number of vessels trading on the North Sea spot market has dropped to 65 from 95 at the turn of the year. Some vessel owners such as Netherlands-based Vroon Offshore have also profited from the booking of their entire North Sea fleets for work in the summer months.

Commensurate with this, strong demand for PSVs over the summer has jacked up utilisation rates to 97%. PSV day rates have also trended up as availability dries up. On the other hand, total AHTS utilisation hovers at 82-84% as this asset class remains plagued by oversupply. Other than ultra-large AHTSs (above 18,000 bhp), day rates for all the other classes of AHTSs have dropped.

Customers are cautiously optimistic. Established North Sea OSV owners and key STX OSV clients such as Farstad Offshore, Solstad Offshore and DOF are cautiously optimistic on OSVs’ recovery. All point towards continued vessel departures to Brazil and higher activities which would improve the market balance. However, they also warn of vessels yet to be delivered to the market. Despite this caution, we note that North Sea OSV owners have resumed their capex spending since they last placed newbuild orders in 2008. For example, until its orders with STX OSV in Nov 10, Farstad had not placed any newbuild orders since end-2006. Fleet rejuvenation, fulfilling industry demands for higher, quality tonnage, stronger balance sheets and buoyant second-hand prices are also forces behind a revisit of newbuild programmes by North Sea owners.

Can the rebound be sustained? Though vessel availability has tightened and should remain so until the winter season, the critical question is whether such activities are merely reflective of North Sea’s seasonality. Our sense is that the summer has been much busier than anticipated, especially seen against the sentiment at the turn of the year, which had pointed to a challenging 2011 for North Sea OSV owners. While consensus and industry players have looked to mid-2012 for a meaningful recovery for the OSV sector, early signs point to a faster-than-expected recovery. With deliveries of newbuilds moderating and heightened E&P, we are optimistic of a sustained recovery.

Positive implications for STX OSV. Judging from the faster-than-expected improvements in the North Sea, we believe STX OSV’s order momentum will strengthen in 2H11 to meet our FY11 order target. On the back of increased enquiries, STX OSV itself is anticipating improvements in 2H11. Interestingly, it has observed renewed interest in AHTS. Such orders, if any, could signal a concrete recovery for the OSV sector.

Valuation and recommendation
Market concerns of potential placement by parent, STX Europe, could be exaggerated. Fears of placements by the parent at steep discounts to the market price or a supply glut dampening prices could very well have been priced in, in our view. A stronger order momentum and the formalising of Transpetro orders in the near term could possibly mitigate such concerns. In addition, a larger free float should be beneficial to the stock’s liquidity in the longer scheme of things.

Yard to own; maintain Outperform. STX OSV remains our top pick among smallmid-cap industrials. Its main positives are: 1) structural improvements in its operating performance from the implementation of production efficiency measures (we are already seeing fruits); 2) its position to capture Brazil’s deepwater growth; and 3) a gross valuation-competency mismatch, in our view. Though clearly a league above local OSV builders, STX OSV is trading in line with local OSV builders’ 5-year average.

No changes to our earnings estimates or target price of S$1.70, still based on 11x CY12 P/E (15% discount to rigbuilders’ 5-year mean). We see catalysts from a stronger order momentum and quarterly results.