UOB Kay Hian analyst Adrian Loh has maintained his &ldquo overweight&rdquo call on the offshore & marine (O& M) sector as demand for oil is expected to grow even though oil prices have come off their highs in 2023.

 

In his July 12 report, Loh notes that the US Energy Information Administration (EIA), in June, had upgraded its oil demand forecast for 2023 and 2024 by 0.5% for both years to 1.6 million barrels per day (mmbpd) and 1.7mmbpd respectively.

 

&ldquo The agency highlighted that crude oil production cuts announced by OPEC+ in early June &lsquo will put some upward pressure on crude oil prices, notably in late-2023 and early-2024&rsquo ,&rdquo he says.

 

On oil prices, the analyst adds that Brent oil for delivery in 2028 is over US$66 ($87.35) per barrel.

 

Offshore oil and gas capital expenditure (capex) is also forecasted to continue growing y-o-y in 2023 and 2024.

 

Furthermore, the analyst notes that data for the sector has remained strong for jack-up rigs, deepwater floaters, floating production systems and offshore renewables.

 

&ldquo In the exploration and production sector, industry players are now looking at dayrates for latest generation drillships of [over] US$500,000/day versus aggregate rates of US$350,000/day at present,&rdquo he writes.

 

&ldquo The number of active offshore rigs registered yet another m-o-m increase in July, and there are now 8% more active rigs compared to the year-ago period,&rdquo he adds.

 

In July, the key newsflow will be the 1QFY2023 earnings season for the oil services sector in both the US and Europe. Both regions reported strong earnings and painted a positive outlook for 2023 due to rising oil demand, tight supply and a renewed focus on energy security &ndash all of which should force an increase in global hydrocarbon production says Loh.

 

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Other positives for the sector include the increase in the backlog for the floating production and storage (FPS) systems, which grew by 63% since its low in 1QFY2022. The increase indicates that the material free cash flow generated by oil companies is being invested, notes Loh.

 

&ldquo In addition, we highlight that there are 176 projects globally in the appraisal, planning or bidding/final design stages, all of which will require FPS systems which Seatrium is exposed to,&rdquo he adds.

 

Seatrium could also benefit from the demand/supply gap that may stem from the growth in global offshore wind and Europe&rsquo s continued push into wind. Industry estimates that global offshore wind could grow by a compound annual growth rate (CAGR) of 14% to 20% over the 2022-2030/2035 period although Europe may face supply-related problems in or around 2028/2029 when offshore turbine towers and wind tower manufacturing capacity may see demand far outstripping supply.

 

&ldquo In our view, Seatrium could benefit from this in the next six to 12 months as European governments take note of the demand/supply gap and place orders for offshore structures well in advance,&rdquo says Loh.

 

&ldquo There is precedence in this given that in March, Seatrium received a EUR3 billion ($4.44 billion) order for offshore wind farm structures that would only be delivered between 2029-2031,&rdquo he adds.

 

Among the O& M companies, Loh continues to like Seatrium, giving it a &ldquo buy&rdquo call with a target price of 17 cents.

 

&ldquo We believe that the company will benefit from stronger offshore marine dynamics as well as demand for offshore vessels and structures related to the renewables industry. In addition, the normalisation of economic activity should result in a greater volume of shipping activities thus positively impacting its repairs/upgrades segment,&rdquo he says.

 

The analyst also expects another $10 billion upside to its current orderbook of $20 billion with Seatrium looking to bid for another two floating production storage and offloading (FPSO) units with each priced at US$3 billion on top of the four FPSOs that it has from Petrobras.

 

It is also looking at a few other floating production units at US$1 billion each, which are likely to be from repeat customers such as ExxonMobil.

 

&ldquo The company also foreshadowed easy cost synergies from bringing these four FPSOs under one Seatrium and Keppel Offshore & Marine (Keppel O& M) roof,&rdquo says Loh.

 

&ldquo In addition, Seatrium has stated that offshore wind in developed markets such as the US and Europe remain highly promising,&rdquo he adds. &ldquo Post-1QFY2023, management affirmed that it has the capacity to accept more projects &ndash and is looking to fill its 2028/2029 production schedule &ndash but given the shortage of global yard capacity and strong level of enquiries it will not &lsquo sell slots&rsquo .&rdquo

 

To Loh, the movements tie up with the industry data that he&rsquo s seen so far and he expects a continued order-win momentum to drive Seatrium&rsquo s share price in the near- to medium-term.

 

Another company investors should be looking at within the O& M space is Yangzijiang Shipbuilding. Loh has given a &ldquo buy&rdquo rating for the company with a target price of $1.65.

 

Yangzijiang&rsquo s order wins continue to be robust with the company winning orders for 46 vessels with a total contract value of US$4.42 billion in the 1QFY2023.

 

&ldquo Yangzijiang currently has 180 vessels in its orderbook totalling US$14.6 billion which is its highest ever. Year-to-date, the company has US$5.6 billion in new orders thus exceeding its FY2023 target of US$3 billion,&rdquo notes Loh.

 

&ldquo We expect management to revise this target up to at least US$7 billion at its 1HFY2023 results in mid- to late-August. We note that Chinese steel costs have come down on a y-o-y basis, potentially setting Yangzijiang up for strong 1HFY2023 results,&rdquo he adds.