YTD, Keppel, and Sembcorp secure orders worth $8.1 billion in Q4 2010

Fundamental remains positive on the back of high crude oil prices. Over the next six months, we believe sector newsflow will remain robust on the back of high crude oil prices. Oil prices are still trading significantly above the investment hurdle of most oil & gas (O&G) majors at US$75/bbl, and we believe this will lead to sustained confidence in investing in new offshore assets and return of contracting work for the service providers. While we note the build-up of price-negative drivers such as lower demand growth and mounting pressure to rein-in speculation and push OPEC to raise output, we think any correction will be shallow and not as severe as the previous cycle. We like (1) Sembcorp Industries for its twin catalyst from offshore marine and growing Utilities earnings; (2) STX OSV for its strong leadership position in construction of high-end offshore support vessels; and (3) Ezion for its strong earnings visibility and superior earnings growth. For the smaller shallow water vessel owners/operators not under our coverage, we are cautious given the oversupply condition is expected to persist until next year.

We expect record orders for yards. Singapore rig builders have enjoyed strong order flow since 4Q10 as rig owners placed new orders to take advantage of the attractive payment terms and bifurcation of charter rates in the jackup segment. YTD, Keppel and Sembcorp Marine have secured ~S$8.1b orders and we believe annual order intake is likely to surpass the peak annual order of S$12.8b in 2007. Our optimism is driven by: (1) 17 jackup options worth more than US$3.5b; (2) high enquiries for conversion related projects and customised semi-sub projects.

Offshore contracting work expected to rise. We expect offshore contracting and utilisation rate for offshore support vessels to improve on the back of high crude oil prices. Recent order flow for oil & gas service providers has been slow but we are optimistic on higher new orders as oil majors are rolling out more new tenders to increase production and replace ageing assets like pipeline and platforms.

Key risks: (1) Sharp fall in crude oil prices; (2) Tightening of the credit market; (3) Orderbook cancellation; and (4) Poor asset utilisation for vessel owners.