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Crude awakening Lowering oil price forecasts, but expect prices

to be above US$90/bbl in the medium term

OSV/service providers are more resilient to lower oil prices vs E&P players or rigbuilders

Stocks are oversold after losing c.15% in 2-weeks on panic selling

Reiterate our conviction BUYs on Ezion, Pacific Radiance, Bumi Armada, Dayang and SapuraKencana. Sell Vard and MMHE. Downgrade Wintermar and BCP to HOLD.

Brent crude oil price trimmed to US$95/bbl for 2015. Dubai crude oil prices fell to a 4-year low at US$83/bbl last week, triggered by the twin effects of growing shale oil supply in the US and slowing global demand growth. Oil prices may weaken further in the next 12-24 months, unless OPEC reaches a consensus to cut production when it meets on 27 Nov. We cut our base case oil price assumption to US$95/bbl in 2015 and US$92 in 2016.

Negative impact on E&P players, knock-on impact on rigbuilders more severe than OSV service providers. We lower our assumptions of oil ASP and margins for E&P companies, order wins for shipyards, and utilisation rates for support vessels. While lower oil prices may lead to slower activities and deferment of the more costly projects, most offshore projects (including deepwater) continue to be viable at US$70-80/bbl.

Stocks oversold. The sell down in equities over the past two weeks has priced in our bear case scenario, which assumes oil price falls to a sustained low level of US$75/bbl. We believe the rebound in oil prices to our base case scenario will drive stock prices up. Companies which are in a better position to withstand oil price volatility are those with exposure to (i) oil production (instead of exploration), (ii) longer term charter contracts, (iii) more exposure to National Oil Companies (NOC) and (iv) less exposure to deepwater exploration activities. This underscores our preference for OSV players and we reiterate our conviction BUYs on OSV service providers – Ezion, Pacific Radiance, Bumi Armada, Dayang and SapuraKencana. Rigbuilders Keppel Corp and SembCorp Marine could ride on a technical rebound with decent upside despite the cuts in price targets. We maintain our sell calls on VARD and MMHE and downgrade BCP and Wintermar to HOLD, following our cuts in earnings and valuation pegs.

STI : 3,154.21 SET : 1,526.15 KLCI : 1,767.77 JCI : 4,951.61 Analyst Janice CHUA +65 6682 3692 Naphat CHANTARASEREKUL +662 657 7826 [email protected] [email protected]

Suvro SARKAR +65 6682 3720 HO Pei Hwa +65 6682 3714 [email protected] [email protected] Arhnue TAN +603 2604 3909 [email protected]

STOCKS

Source: DBS Bank, DBS Vickers, AllianceDBS Closing price as of 16 Oct 2014

DBS Group Research . Equity 20 October 2014

Industry Focus

SE Asia Oil & Gas Sector

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

LCL US$m LCL 3 mth 12 mth Rating

Thailand E&P plays Bt

PTTEP 145.00 17,759 146.00 (12.1) (15.2) FV PTT 345.00 30,400 364.00 4.6 8.2 BUY Thai Oil PCL 46.00 2,895 51.00 (12.8) (29.0) HOLD PTT Global 58.25 8,102 64.00 (14.0) (25.6) HOLD Bangchak Petroleum Pcl

31.75 1,349 34.00 1.6 (8.6) HOLD

IRPC PCL 3.38 2,131 4.20 (0.6) (5.1) BUY Singapore Rigbuilders S$ Keppel Corporation 9.54 13,605 11.10 (12.1) (12.1) BUY Sembcorp Marine 3.60 5,903 4.00 (11.6) (20.5) BUY Cosco Corporation 0.59 1,037 0.62 (15.7) (25.3) FV

Singapore Offshore plays S$

Ezion Holdings 1.42 1,762 2.00 (18.5) (22.2) BUY PACC Offshore 0.67 958 1.00 (41.5) N.A BUY Pacific Radiance 1.07 610 1.36 (27.0) N.A BUY Mermaid Maritime 0.285 317 0.46 (36.0) (23.0) BUY Nam Cheong Ltd 0.365 602 0.48 (21.5) 28.1 BUY Vard Holdings Ltd 0.635 588 0.65 (41.7) (24.0) FV

Indonesia Offshore plays Rp

Wintermar Offshore 1,150 379 1,190 (11.5) 92.9 HOLD Logindo 4,200 221 5,080 (7.5) N.A BUY Malaysia Offshore plays RM Bumi Armada 1.37 2,456 2.30 (31) (42) BUY

Coastal Contracts 3.50 566 5.55 (32) 19 BUY

Deleum Bhd 1.65 201 1.90 (33) 8 HOLD Dayang Enterprise 2.75 734 3.80 (26) (16) BUY

Dialog Group BHD 1.48 2,216 1.65 (20) 7 HOLD

Malaysia Marine & Heavy Engi

2.24 1,091 1.65 (37) (40) FV

SapuraKencana Petroleum

3.16 5,763 5.41 (28) (17) BUY

Pantech Group 0.95 172 1.55 (17) (3) BUY

TH Heavy 0.55 177 0.51 (33) (36) HOLD

UMW Oil & Gas 3.24 2,237 4.15 (21) N.A. BUY

Industry Focus

SE Asia Oil & Gas

Analyst

Janice CHUA +65 6682 3692 [email protected]

HO Pei Hwa +65 6682 3714 [email protected] Naphat CHANTARASEREKUL +662 657 7826 [email protected]

Suvro SARKAR +65 6682 3720 [email protected]

Arhnue TAN +603 2604 3909 [email protected]

Table of Contents

INVESTMENT SUMMARY 3

KEY TABLES ON OIL PRICE IMPACT 5

Scenario analysis on oil price impact

Correlation to oil price

Summary of changes in earnings assumptions

Summary of changes in recommendation and TP

STOCK PICKS & VALUATION 9

Stock pick criteria

Share price performance

Regional peer comparisons

Technical Views –oil price and stocks

TECHNICAL VIEW 15

OIL PRICE FORECASTS AND IMPACT ON

E&P COMPANIES 16

Oil price outlook

Slower order momentum for rigbuilders

OSV cycle will not be affected to a great extent

Protected market - Malaysia is more resilient

Industry Focus

SE Asia Oil & Gas

INVESTMENT SUMMARY Panic selling led to a sea of red for oil and gas stocks in the region. In the wake of the sharp 20% drop in oil prices over the past month, oil and gas stocks took a severe beating, declining by 3-28% across the value chain for stocks under our coverage. The worst hit were stocks in Singapore and Malaysia, compared to Indonesia and Thailand. Share prices of upstream companies engaged in exploration and production and rigbuilders are highly correlated to oil prices as compared to offshore support services companies. In this report, we assess the impact of a lower oil price environment on exploration and production companies, rigbuilders, shipyards, and offshore services support companies. We have lowered our oil price assumptions to US$95/bbl (2015F) and US$92(2016) from US$104 previously. We have also stress-tested our models assuming a more bearish scenario, where oil price drops to a sustained low level of US$75-$80/bbl, to evaluate the potential downside on earnings and valuations of oil and gas companies. Most projects are viable at brent oil price of US$80/bbl. We used US$75/bbl as our bear case scenario as this is a critical level which would determine if oil majors will cut back their exploration budgets. Currently, the breakeven oil price for shallow water exploration activities is around US$30-60/bbl while deepwater is around US$40-80/bbl. Non-conventional sources of oil such as Canadian Sands Oil and Shale Oil are a lot more costly, at around US$60-90/bbl. Breakeven oil price for various projects

Source: Douglas-Westwood

Negative impact on E&P companies, refineries, knock-on impact on shipyards and OSV service providers. Companies which would potentially suffer a direct near term hit on earnings are exploration/production companies as well as refineries due to inventory losses. We shaved earnings of upstream companies and refineries by -5% to -18% for 2015, mainly for companies listed in Thailand. The earnings impact on Singapore rigbuilders (Keppel Corp and SembCorp Marine) are marginal in 2015 due to their secured order book and long project durations, but the cut in new order wins is negative for future earnings, leading to a knock-on effect on valuation reverting to the 10 year mean of 13x PE. Shipyards engaged in building AHTS or other OSV support vessels with shorter term project durations will see a faster depletion of their order books. In this aspect, we have cut 2015 earnings for MMHE, TH Heavy, Vard and Nam Cheong by a more drastic 14% to 26%. Most resilient are the offshore support and services companies or shipowners whose earnings are backed by medium term charters, and are operating in shallow waters or/and cabotage markets of Malaysia and Indonesia. The impact on earnings ranges from zero to 13% - mainly Malaysian and Indonesian listed companies. Most stocks look oversold at these levels. Despite the earnings cuts, we believe most stocks are oversold at current levels assuming our new base case oil price scenario is achieved over the near to medium term (with a rebound from the current low levels to average between US$92-95/ bbl in 2015-16). Even with lower earnings and lower valuation pegs (using mean valuation levels - see table 4), we continue to maintain our calls for most of the stocks under coverage, except for downgrades to HOLD for Wintermar and BCP. We downgrade Wintermar Offshore Marine to HOLD on account of elevated valuations after accounting for possibly slower earnings growth. We had already downgraded Vard to Fully Valued recently in a separate report to account for its exposure to deepwater offshore activity as well as company specific execution issues. BCP was downgraded to HOLD as the company has just raised its refinery capacity by 17% and will be impacted by inventory losses. Bear case valuation provide support levels for stocks. However, if we were to take a bleaker view of the situation and assume a bear case oil price scenario, we would use a valuation peg of -1 std dev from mean valuations and in addition with lower earnings estimates, we believe some of the stocks in our coverage could be vulnerable to further price erosion in such a case. We highlight the bear case share price support levels in the table 4 below. While sector PE had dipped to -2 S.D. levels during the last financial crisis, we do not expect a repeat of the

Industry Focus

SE Asia Oil & Gas

same as supply and demand dynamics of the sector are much better now than in 2009. Valuations at bear case scenario. Following the selldown in equities over the past 2 weeks, share prices are close to our bear case scenario assuming oil price fall to a sustained low level of US$75/bbl. We believe the reversal of oil prices to our base case scenario will drive stock prices up.

Top picks based on score chart. Our score chart to differentiate companies which are in a better position to withstand oil price volatility points to those with exposure to oil production (instead of exploration), longer term charter contracts, more exposure to National Oil Companies (NOC) and less exposure to deepwater exploration activities. This underscores our preference for OSV players, reiterating our conviction BUYs on OSV service providers – Ezion, Pacific Radiance, Bumi Armada, Dayang and SapuraKencana. Rigbuilders Keppel Corp and SembCorp Marine could ride on a technical rebound with decent upside despite the cuts in price targets. We maintain our sell calls on VARD and MMHE and downgrade BCP and Wintermar to HOLD, following our cuts in earnings and valuation pegs.

Score Chart

Company

Less exposure to volatile areas of E&P value chain?

Good revenue visibility?

Execution risks low?

Healthy funding position?

Cheap valuations relative to peers and history? Score

Singapore

Keppel Yes Yes Yes 3

SMM Yes Yes 2

Cosco Yes 1

Ezion Yes Yes Yes Yes 4

POSH Yes Yes 2

PACRA Yes Yes 3

Mermaid Yes Yes 2

Nam Cheong Yes Yes Yes 3

Vard Yes 1 Source: DBS Bank

Industry Focus

SE Asia Oil & Gas

KEY TABLES ON OIL PRICE IMPACT Table 1: Scenario analysis on the impact of lower oil prices on the oil and gas value chain

Segment/ sub-segment New base case scenario (Oil price ~ 95/bbl) Bear case scenario (Oil price ~ 75/bbl) Exploration and Production companies

The impact to E&P companies depends on the proportion of liquid output. The higher liquid output, the more negative impact to their earnings. Our sensitivity shows that every US$1/bbl change in oil prices, this will affect their earnings in the range of US$20-25m, depending on the cost structure of each E&P company.

It is clearly negative as oil normally provides higher margins than gas. But it is difficult to quantify. Based on our sensitivity on PTTEP, this will lower PTTEP’s earnings by 20% in 2015 and 2016 from our base-case scenario.

Rigbuilders While oil prices above US$90 is economically viable

even for deep water projects, we note the slower new order momentum, partly caused by concerns over the short term supply glut with new rig deliveries. We have lowered our order win assumption for 2014 marginally from S$11bn to S$10bn and expect momentum to slow further to S$9bn next year, against the backdrop of slow attrition rate, and benign medium term oil price outlook. Asset prices are expected to soften amidst short term supply glut especially in the jack up segment. The impact to 2015’s earnings is marginal, largely covered by its strong order book. The cut in new orders will affect 2016 earnings and beyond.

If oil price drops to and sustains at US$75/bbl and below, this may lead to lower capex spending for exploration projects and deferment of deep water projects where returns will be marginal. We will be trimming our order win assumption to S$7bn. Newbuild prices and profit margins could fall. Risks of rescheduling and cancellations by speculators loom.

Offshore oil & gas services

OSV – shipyards We have already lowered new order win forecasts for Vard, and we will be assuming slippage of about 1 quarter for 5 vessels from Nam Cheong’s built-to-stock programme for FY15, to be on the conservative side.

If oil prices are stuck in a more bearish rut, we will be lowering new order estimates for Vard further. Along with the previously mentioned slippage, Nam Cheong’s future newbuilding programmes will likely be smaller.

OSV – asset owners With the rig charter market expected to be weak,

there could be delays and cancellations of some speculative units, and as such, the expected growth in rig fleet could be down to low single digit from current expectation of 8-9%. Hence, we will lower our OSV utilisation expectations from c.85% to 80%, and assume rates remain stable for AHTS instead of a 3-5% increase p.a., rates for PSV declines about 5% p.a. and rates for subsea vessels and accommodation vessels remain stable, as before. Margins will be affected as a result.

Under a prolonged low oil price scenario, growth in chartered rig fleet could be negative. Production levels could also be cut and maintenance deferred. Hence, we will lower our OSV utilisation expectations from c.85% to 75%, and assume rates for AHTS to decline by about 5-10% p.a, rates for PSV declines about 5-10% p.a. and rates for subsea vessels and accommodation vessels to decline about 5% p.a. Margins will be more significantly affected.

Source: DBSBank

Industry Focus

SE Asia Oil & Gas

Table 2: Correlations to oil prices are higher for E&P companies and rigbulders; less so for OSV companies and service providers

Singapore Malaysia

Rigbuilders Shipyards

Sembcorp Marine 0.89 Malaysia Marine and Heavy Engi 0.30

Keppel Corporation 0.87 TH Heavy Engineering -0.11

OSV yards Coastal Contracts 0.70

Vard Holdings 0.41 OSV / Service providers

Nam Cheong -0.68 SapuraKencana Petroleum -0.10

OSV / Service providers Bumi Armada 0.41

Ezion 0.40 UMW Oil & Gas Corp 0.26

Pacific Radiance -0.51 Dialog Group 0.78

PACC Offshore Services 0.95 Dayang Enterprise 0.45

Mermaid Maritime 0.00 Deleum Bhd 0.31

Pantech Group Holdings 0.48

Thailand

E&P companies PTT Exploration & Production 0.91 Indonesia

PTT PCL 0.88 OSV / Service providers

Thai Oil PCL 0.41 Wintermar Offshore Marine -0.27

PTT Global Chemical PCL 0.34 Logindo Samudramakmur -0.51

Bangchak Petroleum PCL 0.60 IRPC PCL -0.13

Note: newly list companies Posh, Pacific Radiance and Logindo may not have sufficient listing history to test the correlation numbers. Source: DBS Bank

Industry Focus

SE Asia Oil & Gas

Table 3: Summary of changes in earnings forecasts

Core net profit Core net profit (new base case)

Core net profit (bear case)

(previous base

case)

Company Currency FY15F FY16F FY15F FY16F Chg Chg FY15F FY16F Chg Chg

Singapore Rigbuilders

Keppel S$ 1,629 1,754 1,604 1,670 -2% -5% 1,597 1,605 -2% -8%

SMM S$ 669 764 638 700 -5% -8% 629 656 -6% -14%

Cosco S$ 68 81 63 70 -7% -13% 63 62 -7% -24%

Singapore O&G plays

Ezion US$ 300.4 349.4 300.4 349.4 0% 0% 269.4 311.5 -10% -11%

POSH US$ 165.9 172.4 145.0 147.8 -13% -14% 129.8 129.9 -22% -25%

PACRA US$ 83.9 97.0 77.9 89.5 -7% -8% 73.1 80.7 -13% -17%

Mermaid US$ 53.1 63.7 49.6 57.9 -6% -9% 45.8 52.7 -14% -17%

Nam Cheong RM 309.6 275.2 266.0 267.8 -14% -3% 263.0 217.7 -15% -21%

Vard NOK 481.6 510.1 481.6 510.1 0% 0% 430.6 408.8 -11% -20%

Malaysia O&G plays

SapuraKencana RM 1506.7 1675.6 1429.1 1606.2 -5% -4% 1354.9 1318.4 -10% -21%

Bumi Armada RM 655.4 857.8 640.5 849.3 -2% -1% 606.1 794.9 -8% -7%

MMHE RM 180.6 196.7 147.5 150.5 -18% -24% 117.4 93.6 -35% -52%

UMWOG RM 406.9 447.3 406.9 447.3 0% 0% 352.4 380.4 -13% -15%

Dialog RM 253.4 276.2 253.4 276.2 0% 0% 240.7 251.1 -5% -9%

Dayang RM 209.0 223.9 209.0 223.9 0% 0% 179.3 193.2 -14% -14%

Coastal RM 221.1 253.5 204.8 250.2 -7% -1% 181.5 217.6 -18% -14%

TH Heavy RM 57.5 76.1 42.7 62.0 -26% -18% 15.0 28.1 -74% -63%

Deleum RM 67.9 73.7 67.9 73.7 0% 0% 66.5 71.7 -2% -3%

Pantech RM 59.0 75.5 56.8 75.5 -4% 0% 55.5 69.0 -6% -9%

Indonesia O&G plays

Wintermar US$ 37.4 42.7 34.8 38.2 -7% -10% 29.9 34.6 -20% -19%

Logindo US$ 29.3 34.4 25.6 29.2 -13% -15% 24.8 23.5 -15% -32%

Thailand E&P plays PTTEP Btm 66,334 59,706 61,058 52,399 -8% -12% 48,785 42,128 -26% -29%

PTT Btm 94,546 93,966 89,840 87,819 -5% -7% 83,256 81,755 -12% -13%

TOP Btm 7,541 7,628 6,404 6,928 -15% -9% 1,768 1,130 -77% -85%

PTTGC Btm 29,667 29,384 29,001 28,695 -2% -2% 26,150 25,352 -12% -14%

BCP Btm 6,356 6,449 5,913 5,494 -7% -15% 4,245 3,859 -33% -40%

IRPC Btm 4,307 4,191 3,512 3,311 -18% -21% 1,220 1,005 -72% -76%

Source: DBS Bank estimates

Industry Focus

SE Asia Oil & Gas

Table 4: Summary of changes in valuation methodology, target price and recommendation

Previous Base Case New Base Case Bear Case Scenario

Company Last Px

(18 Oct) Metric Multiple TP Rcmd Multiple TP Rcmd Multiple Support


Keppel 9.46 SOTP 16x 12.60 BUY 13x 11.10 BUY 10x 9.34

SMM 3.62 SOTP 16x 4.82 BUY 13x 4.00 BUY 10x 3.05

Cosco 0.60 P/Bv 1.15x 0.69 FV 1.0x 0.62 FV 0.8x 0.50

Singapore O&G plays

Ezion 1.47 FY15 PE 12x 2.40 BUY 10x 2.00 BUY 8x 1.50

POSH 0.68 FY15 PE 10x 1.15 BUY 10x 1.00 BUY 7x 0.63

PACRA 1.085 FY15 PE 11x 1.62 BUY 10x 1.36 BUY 7x 0.90

Mermaid 0.31 FY15 P/B 1.1x 0.57 BUY 0.9x 0.46 BUY 0.7x 0.36

Nam Cheong 0.395 FY14/FY15

PE 10x 0.52 BUY 10x 0.48 BUY 7x 0.33

Vard 0.66 FY15 PE 8x 0.65 FV 8x 0.65 FV 7x 0.51

Malaysia O&G plays

SapuraKencana 3.47 FY16 PE 22x 5.55 BUY 20x 5.41 BUY 18x 4.00

Bumi Armada 1.42 SOP - 2.55 BUY - 2.30 BUY - 2.10

MMHE 2.28 FY15 PE 20x 2.25 FV 18x 1.65 FV 16x 1.20

UMWOG 3.38 FY15 PE 22x 4.15 BUY 22x 4.15 BUY 18x 2.90

Dialog 1.58 SOP - 1.65 Hold - 1.65 Hold - 1.55

Dayang 2.88 FY15 PE 18x 4.55 BUY 15x 3.80 BUY 13x 2.83

Coastal 3.56 FY15 PE 15x 6.00 BUY 15x 5.55 BUY 13x 4.30

TH Heavy 0.585 FY15 PE 15x 0.95 Hold 13x 0.51 Hold 10x 0.39

Deleum 1.93 FY15 PE 13x 2.2 Hold 11x 1.90 HOLD 10x 1.66

Pantech 0.95 FY16 PE 13x 1.55 BUY 13x 1.55 BUY 11x 1.18

Indonesia O&G plays

Wintermar 1175 FY15 PE 15x 1600 BUY 12x 1190 HOLD 10x 860

Logindo 4175 FY15 PE 12x 6350 BUY 11x 5080 BUY 10x 4470

Thailand E&P plays PTTEP 145.5 FY15 PE 9.8x 164.0 HOLD 9.5x 146.0 FV 9.7x 118.0

PTT 354 FY15 SOTP - 366.0 BUY - 364.0 BUY - 330.0

TOP 44 FY15 PBV 1.3x 61.0 HOLD 1.1x 51.0 HOLD 1.1x 49.0

PTTGC 56.75 FY15 EV/EBITDA

6.0x 66.0 HOLD 6.0 64.0 HOLD 6.0 58.0

BCP 32.75 FY15 PBV 1.3x 37.0 BUY 1.1x 34.0 HOLD 1.1x 30.0

IRPC 3.36 FY15 PBV 1.2x 4.5 BUY 1.1x 4.2 BUY 1.1x 3.8


Industry Focus

SE Asia Oil & Gas

STOCK PICKS & VALUATION

Criteria for stock picks Among our coverage of regional offshore oil & gas service stocks, we prefer those which have more exposure to the production side of the value chain, longer term contract coverage, and more exposure to National Oil Companies (NOC) and less exposure to deepwater exploration activities. We reckon these stocks are a better bet to ride out the current volatility. In this aspect, Ezion stands out with its long term contracts as well as exposure to accommodation/ maintenance requirements of producing fields. Other OSV stocks have varying degrees of exposure to exploration vs. production, shallow water vs. deep water, and NOC vs. IOC customers, as seen in table 6. We identify a few criteria to help select our top picks in the current volatile environment – i) exposure to the less cyclical parts of the E&P value chain – shallow water/ production/ national oil company customers/ cabotage markets, ii) high orderbook/ revenue visibility, iii) low earnings execution risks, iv) healthy balance sheet and funding positions and v) cheaper valuations than peers or historical. Based on these criteria, our top picks are: Ezion, Pacific Radiance, Bumi Armada, Sapura Kencana and Dayang. We would avoid Vard in the near term, and also prefer Logindo over Wintermar in the Indonesian OSV space on cheaper valuations. Malaysia offers good bargain hunting opportunities, as earnings are resilient while share prices have corrected. Our top picks following the recent sell-down are SapuraKencana, Bumi Armada and Dayang Enterprises. SapuraKencana’s current share price does not impute any value created from their Newfield acquisition which is not justified, in our view. These assets

continue to be earnings accretive even on lower crude oil prices and furthermore, recent gas discoveries would further boost its potential. SapuraKencana has a RM25bn orderbook which provides solid earnings visibility for the next 12-24 months. Similarly, Bumi Armada’s earnings for the next 5-10 years are backed by long term fixed FPSO contracts amounting to RM22bn. Including optional extensions, Bumi Armada’s orderbook balloons further to RM32bn. As for Dayang Enterprises, we like the stock as it is exposed to the maintenance market, therefore its earnings profile is very resilient. An orderbook of RM4.5bn would generate record earnings for Dayang for the next 2-3 years. From Thailand, we maintain our hold calls on E&P companies and refineries, except for PTT(maintain BUY) as it is a beneficiary of upcoming sector reforms. The government has already approved raising NGV selling prices by Bt1 to Bt11.5/kg, leading to earnings increasing by 4% in 2015. The government will conduct another review on 22 Oct to decide if there will be another price increase. This positive newsflow has boosted sentiment on PTT’s share price. However, PTT’s earnings would be diluted by 5% in 2015 and 6% in 2016 from our downward revision in oil prices. The net effect of NGV price increase (based on Bt1/kg increase) and our new oil price assumption lowers our SOTP valuation from Bt366/sh to Bt364/sh. Of the refineries, we downgraded BCP to HOLD, as it will be negatively impacted by inventory losses and it has just increased its refining capacity by 17%. We cut BCP earnings by 7%(2015F) and 16%(2016F) and accordingly, cut TP to Bt34.0/share.

Table 5: Criteria for selecting our top picks in the space and score for companies in our coverage

Company






Singapore

Keppel Yes Yes Yes 3

SMM Yes Yes 2 Cosco Yes 1 Ezion Yes Yes Yes Yes 4 POSH Yes Yes 2 PACRA Yes Yes 3

Mermaid Yes Yes 2 Nam Cheong Yes Yes Yes 3 Vard Yes 1

Source: DBS Bank

Industry Focus

SE Asia Oil & Gas

Table 5: Criteria for selecting our top picks in the space and score for companies in our coverage

Malaysia

SapuraKencana Yes Yes Yes 3

Bumi Armada Yes Yes Yes Yes 4

MMHE Yes 2

UMWOG Yes Yes Yes 3

Dialog Yes Yes Yes Yes 4

Dayang Yes Yes Yes Yes Yes 5

Coastal Yes Yes 2

TH Heavy 0

Deleum Yes Yes Yes Yes 4

Pantech Yes Yes Yes Yes 4

Indonesia

Wintermar Yes Yes 2

Logindo Yes Yes Yes 3


Industry Focus

SE Asia Oil & Gas

Table 6: Companies with higher exposure to production phase / shallow water segment / NOC-related projects and high orderbook visibility should be more resilient to oil price decline

Company % of FY15 earnings from

% of FY15 earnings from


Current book-to-bill ratio

% of FY15 earnings

secured by orderbook

Exploration Production Shallow water

Deep water

NOC related

IOC & others

Singapore Ezion 10% 90% 100% 0% 60% 40% 3.1x 95% POSH 34% 66% 49% 51% 55% 45% 0.8x 60% PACRA 52% 48% 90% 10% 10% 90% 0.7x 50% Mermaid 43% 57% 100% 0% 55% 45% 2.0x 50% Nam Cheong 44% 56% 100% 0% 50% 50% 1.0x 50% Vard 15% 85% 10% 90% 30% 70% 1.7x 75%

Malaysia SapuraKencana 10% 90% 60% 40% 70% 30% 2.4x 100% Bumi Armada 10% 90% 80% 20% 20% 80% 10x 80% MMHE 0% 100% 60% 40% 60% 40% 0.7x 60% UMWOG 100% 0% 90% 10% 80% 20% 1.5x 85% Dialog 0% 100% 0% 10% 80% 20% n/m n/m Dayang 0% 100% 100% 0% 30% 70% 3.5x 90% Coastal 50% 50% 60% 40% 0% 100% 2.2x 80% TH Heavy 0% 100% 100% 0% 60% 40% 0.5x 50% Deleum 20% 80% 100% 0% 60% 40% 5.1x 100% Pantech 0% 70% 60% 0% 30% 70% n/m n/m

Indonesia Wintermar 57% 43% 87% 13% 30% 70% 0.7x 50% Logindo 56% 44% 76% 24% 30% 70% NA NA


Industry Focus

SE Asia Oil & Gas

Table 7: Share price performance sorted by % decline over the past two weeks by country; Top picks are highlighted in blue

Share price performance 2-Week 1M 3M 6M 2014 YTD 2013

Singapore -15% -16% -22% -16% -15% 5% VARD -27% -27% -42% -36% -19% -37% Mermaid -22% -21% -35% -39% -37% 46% Pacific Radiance -22% -25% -25% 0% 23% -2% POSH -21% -18% -41% -41% -41% na Ezion -20% -20% -19% -22% -21% 58% Rex -19% -18% -18% -10% -13% na Nam Cheong -16% -9% -21% 13% 25% 19% Cosco Corp -13% -13% -16% -16% -21% -16% Keppel Corp -8% -10% -12% -14% -15% 5% Sembcorp Marine 1% -4% -12% -11% -18% -3%

Malaysia -15% -16% -22% -23% -17% 54% Bumi Armada -25% -19% -31% -42% -42% 1% UMW O&G -25% -11% -21% -12% -16% 43% MMHE -22% -26% -37% -40% -35% -20% Coastal Contract -21% -23% -32% -29% 4% 72% TH Heavy -19% -28% -33% -36% -34% 68% Dayang Enterprise -13% -16% -26% -22% -25% 143% Pantech Group -10% -9% -17% -4% -3% 44% Deleum -10% -12% -33% -23% 17% 127% SapuraKencana -10% -17% -28% -20% -29% 56% Dialog Group -5% -8% -20% -11% -11% 49% Petronas Chemical -3% -3% -10% -11% -12% 8%

Indonesia -9% -11% -10% 35% 74% 44% Logindo -10% -15% -7% 16% 44% 4% Wintermar -9% -11% -12% 35% 74% 44%

Thailand -4% -6% -6% -5% -3% -8% TOP -11% -17% -12% -16% -22% -17% PTTEP -6% -11% -14% -8% -13% 2% BCP -4% -4% 2% 4% 17% -12% PTT -4% 1% 4% 14% 24% -14% PTTGC -2% -7% -14% -20% -28% 13% IRPC 0% 1% 1% -6% 3% -21%

Source: Bloomberg Finance L.P.

Industry Focus

SE Asia Oil & Gas

Table 8: Regional peer comparisons

Source: DBS Bank, DBS Vickers, Bloomberg Finance L.P. * FY15 & 16 forecast

Name Crncy Price Mkt Cap EBIT DA CA GR P/B ROE16 Oct (US$m) F Y14F F Y15F F Y14F F Y15F 13-15 F Y14F F Y14F

SingaporeEzion Holdings Ltd SGD 1.420 1,762 9.0 6.0 10.4 7.0 51% 1.7 22.5Mermaid Maritime PCL SGD 0.285 317 6.8 6.0 3.7 3.1 40% 0.6 8.7Nam Cheong Ltd SGD 0.365 602 7.7 6.4 9.1 7.9 25% 1.8 24.9Pacific Radiance Ltd SGD 1.070 610 7.0 7.0 8.8 7.1 30% 1.4 21.0Pacc Offshore Serv ices Holding SGD 0.670 958 11.9 5.8 11.5 6.4 49% 0.8 7.6Vard Holdings Ltd SGD 0.635 588 15.6 8.0 20.0 10.2 8% 1.0 6.5A v erage 9.7 6.5 10.6 6.9 34% 1.2 15.2Malay siaBumi Armada Bhd MYR 1.37 2,456 15.8 12.3 9.3 8.1 19% 1.5 10.6Coastal Contracts Bhd MYR 3.50 566 9.9 8.7 9.4 8.0 47% 1.3 15.3Deleum Bhd MYR 1.65 201 11.2 9.7 6.0 4.9 20% 2.4 23.1Dayang Enterprise Holdings Bhd MYR 2.75 734 11.9 10.8 7.7 6.7 36% 2.8 26.1Dialog Group BHD MYR 1.48 2,216 35.2 30.0 25.1 19.9 20% 4.9 14.8Malaysia Marine and Heavy Engi MYR 2.24 1,091 21.9 19.8 12.9 12.0 0% 1.4 6.3SapuraKencana Petroleum * MYR 3.16 5,763 12.5 11.2 9.3 8.6 34% 1.6 13.8Pantech Group Holdings * MYR 0.95 172 9.1 7.1 6.4 5.4 14% 1.2 13.3TH Heavy Engineering Bhd MYR 0.55 177 32.6 12.0 20.2 9.5 212% 1.6 5.2UMW Oil & Gas Corp Bhd MYR 3.24 2,237 27.0 17.2 15.8 11.2 43% 2.3 8.8A v erage 18.7 13.9 12.2 9.4 45% 2.1 13.7IndonesiaLogindo Samudramakmur Tbk PT IDR 4,200 221 8.9 7.5 7.8 6.8 36% 1.7 20.3Wintermar Offshore Marine Tbk IDR 1,150 379 12.8 10.1 7.6 6.3 20% 1.7 14.7A v erage 10.8 8.8 7.7 6.6 28% 1.7 17.5T hailandPTT Exploration & Production P THB 145.00 17,759 8.9 8.7 3.5 3.4 8% 1.4 16.1PTT PCL THB 345.00 30,400 10.4 10.4 5.0 4.8 2% 1.3 13.2Thai Oil PCL THB 46.00 2,895 12.1 12.4 6.8 6.7 -10% 1.0 8.5PTT Global Chemical PCL THB 58.25 8,102 9.2 8.8 6.5 6.0 -6% 1.0 11.7Bangchak Petroleum PCL/The THB 31.75 1,349 8.8 7.9 5.2 4.5 9% 1.1 15.9IRPC PCL THB 3.38 2,131 24.3 16.0 11.7 9.6 24% 0.9 3.7A v erage 12.3 11.1 6.4 5.8 5% 1.1 11.5EuropeBourbon SA EUR 20.25 1,182 45.2 16.3 8.1 8.0 -4% - -Farstad Shipping ASA NOK 69.00 411 7.3 5.1 - 6.2 11% 0.4 4.1Prosafe SE NOK 32.22 1,176 5.7 4.6 6.6 4.8 16% 1.6 27.2Siem Offshore Inc NOK 5.19 289 7.4 4.1 8.6 6.0 40% 0.4 5.2Solstad Offshore ASA NOK 79.00 437 4.3 4.0 7.7 6.7 6% 0.6 10.4A v erage 14.0 6.8 7.8 6.4 14% 0.7 11.7USTidewater Inc * USD 36.74 1,843 8.9 7.6 7.5 6.1 15% - -Hornbeck Offshore Serv ices Inc USD 26.55 1,009 10.3 7.0 7.0 4.5 25% - -SEACOR Holdings Inc USD 76.10 1,537 28.0 20.2 8.4 6.6 25% - -Gulfmark Offshore Inc USD 30.23 842 9.7 7.7 7.1 6.0 17% 0.7 8.0A v erage 14.2 10.6 7.5 5.8 20% 0.7 8.0

PE EV /EBIT DA

Industry Focus

SE Asia Oil & Gas

Potential rebound for Brent Crude from USD82pbl to USD90pbl brings near-term respite for O&G stocks

Oil price has been falling in recent months on concerns about rising supply from US shale oil production and weak demand amid signs of a slowdown in the global economy. The price of Brent crude (BB quote: CO1) has fallen from a high of c.USD115pbl in June to as low as USD82.6pbl last week. From a technical perspective, we see a short-term support at USD80-82pbl. Oil price ended the previous week at USD6pbl off the low of USD82.6, indicating that the rebound off USD80-82pbl support has began. Technically, the rebound should test the initial resistance around USD90pbl level. This initial bounce should provide a much needed respite for O&G stocks that have been badly hammered over the past month.

Beyond this, the next resistance is USD97pbl. To reach there, we think oil price would have to first consolidate between the USD80 to USD90pbl range and a catalyst be triggered before prices are able to punch above USD90pbl up to USD97pbl. One such potential catalyst could be the OPEC meeting on 27 November.

Brent Crude (Daily) – USD82 to USD90pbl in the short-term

Source: DBS Research

The short-term rebound in oil price that is currently panning out provides a near-term respite for O&G stocks. The table below shows the % price decline for stocks under our coverage since 12 September, and the short sell volume. (pls add the short sell vol and % of volume to this table)

Share price performance of O&G stocks under our coverage since 12 Sept

Company Price (S$) 16-Oct

% chg since 12 Sept

Vard Holdings 0.635 -34%

Rex International 0.48 -28%

Mermaid Maritime 0.285 -25%

Pacific Radiance 1.07 -24%

Ezion Holdings 1.42 -23%

Nam Cheong 0.365 -21%

Kim Heng O&M 0.195 -19%

Keppel Corp 9.54 -11%

SembCorp Marine 3.58 -7% Source: DBS Bank Short Sell Vol since 12 Sep till 16 Oct

Short Sell Vol (m shrs)

Short Vol to Tot Vol (%)

Nam Cheong 63.3 31

Sembcorp Marine 27.8 27

Ezion 51.1 23

SCI SP Equity 6.7 15

VARD SP Equity 28.5 15

KEP SP Equity 14.0 14

REXI SP Equity 18.6 9

PACRA SP Equity 1.9 5

MMT SP Equity 0.2 1

POSH SP Equity 0.3 1 Source: Bloomberg Finance L.P., DBS Bank

Industry Focus

SE Asia Oil & Gas

TECHNICAL VIEW Keppel Corp ($9.46)

The relatively high volume of 13.3mil shares transacted on 17 Oct couple with a bullish ‘hammer’ on the candlestick chart following the recent precipitous decline indicates a short-term low formed at $9.37. Technical oscillators are oversold. For example, the 14D RSI reads just 9.1 (oversold below 30).

Scope for a rebound to $10-10.20 with initial resistance along the way at $9.73. $9.00

$9.50

$10.00

$10.50

$11.00

$11.50

Jan 14 Mar 14 May 14 Jul 14 Sep 14

Short Sell Vol since 12 Sep: 14m shares % Short Vol to Tot Vol: 14%

Sembcorp Marine ($3.62)

The stock started its decline earlier from $4.15 in late July. It touched a low of $3.54 on 3ed October and outperformed its other O&G stocks since by simply not making fresh lows. This suggests price resilience around current levels.

Scope for a rebound towards $3.90 with initial resistance at $3.80.

$3.50

$3.60

$3.70

$3.80

$3.90

$4.00

$4.10

$4.20

$4.30

$4.40

$4.50

Jan 14 Mar 14 May 14 Jul 14 Sep 14 Short Sell Vol since 12 Sep: 27.8m shares % Short Vol to Tot Vol: 14%

Ezion ($1.47)

Last week’s low of $1.42 is a mere 6cts above a major 38.2% downward retracement level (i.e. key support) at $1.36 that tracks back the stock’s multi-year bull market from its Oct11 low to the Jan14 peak. Technical oscillators are oversold. For example, the 14D RSI reads 25 (oversold below 30).

With the present near-term rebound in oil price, the risk of the stock dipping a little further to $1.36 major support before rebounding is low.

Taking the view that the near-term low is seen at $1.42 last week, scope for a rebound to $1.61 with initial resistance at $1.54.

$1.30

$1.40

$1.50

$1.60

$1.70

$1.80

$1.90

$2.00

$2.10

$2.20

Jan 14 Mar 14 May 14 Jul 14 Sep 14

Short Sell Vol since 12 Sep: 51.0m shares % Short Vol to Tot Vol: 23%

Pacific Radiance ($1.085)

The stock has fallen 27% from its 19th Sept high of $1.49.

The relatively high volume of 6.3mil shares transacted on 16 Oct and 5.48mil shares on 17 Oct coupled with the appearances of a bullish ‘hammer’ on the candlestick chart following the recent precipitous decline suggests the formation of a short-term low. Technical oscillators are oversold. For example, the 14D RSI reads 24 (oversold below 30).

Scope for a rebound towards $1.20 (38.2% upward retracement) with initial resistance at $1.13 (23.6% upward retracement). Beyond this, the 50% upward retracement is at $1.26.

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50


Nam Cheong ($0.395)

The stock has rebounded off its $0.36 low last week. We see further gains capped at $0.43 short-term resistance. Further gains to $0.42-0.43, which represents an 18% rebound from last week’s low, should trigger profit taking and stall the rebound.

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50


Industry Focus

SE Asia Oil & Gas

OIL PRICE FORECASTS AND IMPACT ON E&P COMPANIES

Oil demand growth to moderate in 2015 The global economic slowdown has prompted major energy agencies to lower their oil demand forecasts. A slowdown in demand growth in 1H14 and a weaker outlook in Europe and China have led to the downward revisions. IEA expects global oil demand growth at 0.7m bpd for 2014 and 1.1m bpd for 2015, down from 1.3m bpd last year. US Energy Information Administration (EIA) is also forecasting that demand will grow by 1.2m bpd in 2015 (from 1.02m bpd in 2014). The global weakening economy continues to weigh down on demand outlook. While the increase in demand is moderating, we have seen rising supply coming into play. This comes from growing production from OPEC members and the US. OPEC production output reached 30.9m bpd this month, compared to Dec 13’s average of 30m bpd. Higher output came from Libya, which has seen its production levels rising from 500k bpd last month to 780k bpd in Sep 2014, and Iraq, with production rising to 3.5m bpd, compared to an average of 3.1m bpd in 2013. Meanwhile, the biggest exporter, Saudi Arabia, is less willing now to cut production than in the past. Saudi Arabia has maintained its production at 9.65m bpd in the past two months, compared to 9.1m bpd in early 2013. OPEC Crude Output (‘000 bpd) OPEC countries Dec-2013 Aug-2014 Sep-2014 MoM chg

Algeria 1,140 1,125 1,100 -2.2% Angola 1,738 1,750 1,870 6.9% Ecuador 546 559 550 -1.6% Iran 2,680 2,800 2,780 -0.7% Iraq 3,100 3,100 3,500 0.0% Kuwait 2,964 2,890 2,944 1.9% Libya 210 500 780 56.0% Nigeria 1,931 2,200 2,100 -4.5% Qatar 720 727 740 1.8% Saudi Arabia 9,800 9,600 9,650 0.5% UAE 2,760 2,800 2,850 1.8% Venezuela 2,450 2,471 2,471 0.0% Total OPEC output 30,039 30.522 30.935 1.4%


Global oil production and consumption

76.078.080.082.084.086.088.090.092.094.096.0

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

Wold production World consumption

Million bpd

Source: US EIA

The supply side had increased when news flow showed discord among OPEC members. Some OPEC members whose national budgets depend on oil seem to prefer to keep selling at lower prices than losing market share. Saudi Arabia and Iraq have been competing in recent weeks to cut prices, resulting in both Brent and Dubai crude oil prices to fall below US$85/bbl for the first time in four years in mid Oct 2014. Although the winter season is just months away, we doubt that this will lift crude oil prices by any significant amount as fundamentals are largely dependent on sustainable economic recovery.

US shale oil revolution adds to supply glut The US has seen its crude inventory increase by 30% in the past decade. This has been mainly due to growing output of shale oil or ‘tight oil’, which represented 34% of total crude production in US in 2012 (12% of total petroleum supply). In the Annual Energy Outlook 2014, shale oil production is expected to increase to 4.8m bpd in 2021 or 43% of crude production in US. US petroleum supply by source

Source: US EIA, Annual Energy Outlook 2014 US production is expected to grow by1.5m bpd this year and 1.2m bpd next year, which would make the US the leading contributor of non-OPEC crude oil production growth in 2015. The market is expected to be faced with abundant crude oil supply from both OPEC and non-OPEC producing countries.

Industry Focus

SE Asia Oil & Gas

Crude inventory in the US

250,000

270,000

290,000

310,000

330,000

350,000

370,000

390,000

410,000

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

'000 bbl

Source: Bloomberg Finance L.P

US led non-OPEC production growth

-1.0-0.50.00.51.01.52.02.53.03.54.04.5

Un

ited

Sta

tes

Ca

na

da

Ch

ina

Ru

ssia

Bra

zil

Su

da

n/S

. Su

da

n

Ka

zakh

sta

n

Om

an

Co

lom

bia

Ma

lays

ia

Ind

ia

Vie

tna

m

Ga

bo

n

Oth

er N

ort

h S

ea

Au

stra

lia

Eg

ypt

No

rwa

y

Aze

rba

ijan

Syr

ia

Me

xico

Un

ited

Kin

gd

om

201520142013

Non-OPEC Crude Oil and Liquid Fuels Production Growthmillion barrels per day

Source: US EIA, October 2014

Non OPEC production

51,000

51,500

52,000

52,500

53,000

53,500

54,000

54,500

55,000

55,500

Jan‐13

Feb‐13

Mar‐13

Apr‐13

May‐13

Jun‐13

Jul‐13

Aug‐13

Sep‐13

Oct‐13

Nov‐13

Dec‐13

Jan‐14

Feb‐14

Mar‐14

Apr‐14

May‐14

Jun‐14

Jul‐14

Aug‐14

'000 bpd

Source: US EIA, October 2014

OPEC’s surplus capacity at the high end of 12-year average Excluding 2009-2011 when EU and US economies fell into recession, OPEC’s surplus capacity is estimated to be high at 3.0m bpd in 2015. Although surplus capacity has always been in the market, it can translate into production within weeks. OPEC members will meet on 27 Oct to discuss output policies and whether to act to stem the price decline. Between now to the meeting date, we may see further prices slides due to higher output from its members.

OPEC crude oil surplus capacity

3.1

3.4

5.0

3.1

4.1

5.7

1.9

1.3

1.0

1.5

2.1

1.4

3.8

4.0

3.0

2.1

2.1

2.2

3.0

0.00

1.00

2.00

3.00

4.00

5.00

6.00

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15F

m bbd

2003-2013 year average at 2.2m bbd

Source: US EIA Investors have less appetite for oil The fundamentals in the oil market lead us to believe that a sustainable rebound in oil prices to beyond US$100 is less likely in the next 12 months. This is also reflected in the sharp drop of net long positions in WTI futures contracts in the past three months. Investors are turning more cautious and the weak global economy will continue to weigh down on oil demand.

Net long positions of WTI Futures contracts have declined sharply in recent months

0

20

40

60

80

100

120

140

160

(100,000)

-

100,000

200,000

300,000

400,000

500,000

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Net long position (LHS) WTI crude oil price

No. of contracts US$/bbl

Source: Bloomberg Finance L.P

Industry Focus

SE Asia Oil & Gas

Discount between Brent and WTI has narrowed from over US$20bbl in 2012 to US$4/bbl US had been facing a supply glut in the past few years, which led to the large discount of WTI to Brent crude. The discount over the past twelve months has declined significantly from over US$20/bbl in 2012 to US$4/bbl currently. This problem is being alleviated due to the reversal of the direction of crude oil flow in the Seaway pipeline. This started in mid-2012 from the US Gulf Coast to oil trading hub Cushing, Oklahoma to Cushing to US Gulf Coast. This reversal allows crude oil to flow from inland to the US Gulf Coast where a majority of oil refiners are located. This has unwound the supply glut and made WTI crude more available in the market, leading to the narrower discount of WTI to Brent.

Seaway pipeline


Reversal of direction of oil flow has narrowed the discount between WTI and Brent crude oil prices

Dubai oil price assumption revised down to US$95/bbl in 2015

Given the weakening global economy and downside risk to crude oil demand, we lower our base-case oil price assumption to US$100/bbl this year (we expect crude oil prices to hover at US$88 in 4Q14) and US$95 next year, and US$92 in 2016, from US$106, US$104 and US$104, respectively. We assume US$92 as our long-term price

If China’s economic data worsens, this could further reduce demand in non-OECD countries. As marginal cost of production for high-cost deep sea projects is estimated at US$75/bbl, we use US$75/bbl as our bear-case scenario to estimate the potential downside on earnings and valuations of oil and oil-related companies. The only positive news on the demand side is that lower prices may prompt inventory buildup and support oil prices.

Our base-case forecast for crude oil prices

2014 2015 2016

Previous Dubai crude 106 104 104 New Dubai crude 100 95 92

Source: DBS Vickers

Biggest cut in earnings for E/P companies and refineries Based on our new base-case oil prices, PTTEP’s and refiners’ earnings are the most leveraged to downside risk. Downside risk to their earnings is in the range of 8-19% for 2015 and 9-21% for 2016. We maintain our valuations for most of them, except TOP, BCP and IRPC, which we value based on PBV. We lower our valuations for these three companies from previous 1.3x to 1.1x PBV to reflect weaker outlook. Bear case scenario triggers Fully Valued call for PTTEP Assuming our bear-case scenario (at US$75/bbl), TOP’s and IRPC’s earnings are affected the most with declines of 65-84% for 2015 and 2016, followed by BCP, PTTEP, PTTGC, and PTT. PTT has the least impact given its broad earnings base and more stable gas operations. The bear-case scenario will lower our recommendation of PTTEP to Fully Valued from HOLD.


405060708090

100110120130140

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

US$/bbl Brent Dubai WTI

Industry Focus

SE Asia Oil & Gas

Impact of lower oil prices on Thailand E&P companies and refineries

Segment/ sub-segment New base case scenario Bear case scenario

(US$95/bbl) (US$75/bbl)

E&P companies

PTTEP 33% of PTTEP’s production volume is liquid (another 67% gas). Our base case oil price assumption reduces PTTEP’s earnings by 7.8% in 2015 and 11.3% in 2016. This lowers our DCF-based valuation to Bt146/sh. Downgraded to FULLY VALUED.

The bear case scenario lowers PTTEP’s earnings by 20% in 2015 and 2016. This lowers our DCF-based TP to Bt118/sh and our recommendation can potentially be downgraded to FULLY VALUED.

PTT PTT’s share price has outperformed peers in recent weeks as it is a beneficiary of upcoming sector reforms. The government has already approved raising NGV selling prices by Bt1 to Bt11.5/kg, leading to earnings increasing by 4% in 2015. The government will review again on 22 Oct to decide if there will be another price increase. This positive newsflow has boosted sentiment on PTT’s share price. However, PTT’s earnings would be diluted by 5% in 2015 and 6% in 2016 from our downward revision in oil prices. The net effect from NGV price increase (based on Bt1/kg increase) and our new oil price assumption lower our SOTP valuation from Bt366/sh to Bt364/sh. Maintain BUY.

The bear case scenario will lower PTT’s earnings by 7% in 2015 and 2016. This will reduce our SOTP valuation to Bt330/sh and our recommendation can potentially be downgraded to HOLD.

TOP Refiners are the most hit from falling crude oil prices. TOP could book inventory losses of Bt1.2bn in 2015 and Bt700m in 2016, reducing earnings of TOP by 15.1% and 9.2%, respectively. We have reduced our target P/BV multiple from 1.3x to 1.1x to reflect the weak sentiment in the oil sector. Our TP is cut from Bt61/sh to Bt51/sh. Maintain HOLD.

The stock loss will dampen TOP’s earnings by 72% in 2015 and 84% in 2016 from our previous base case forecast. This has limited impact on our TP as we value TOP based on P/BV. Our TP is Bt49.0/sh and our recommendation remains unchanged at HOLD.

PTTGC The impact on inventory loss for PTTGC’s earnings is less severe than TOP because of lower earnings contribution from refinery. PTTGC’s earnings are driven by petrochemical business. Our base-case assumption lowers PTTGC’s earnings by 2.5% in 2015 and 2016. Our TP drops slightly to Bt64/sh, based on 6.0x FY15F EV/EBITDA. PTTGC is still facing an overhang issue on LPG feedstock price increase, which will be a drag on its share price. Maintain HOLD.

The bear case scenario will dampen PTTCG’s earnings by 10% in 2015 and 12.0% in 2016. Our TP is reduced to Bt58/sh. Maintain HOLD.

BCP Similar to TOP and PTTGC, BCP’s earnings will be negatively impacted from inventory loss. The company just replaced its CDU2 in 2Q14 with a new CDU, which increases refinery capacity by 17% (from 120kbd to 140kbd). Our new oil price lowers BCP’s earnings by 6.8% in 2015 and 16% in 2016. We lower our target P/BV multiples from 1.3x to 1.1x, in line with TOP, to derive new TP at Bt34.0/sh. Hence, we downgrade BCP to HOLD (from BUY).

The worst case scenario will dilute BCP’s earnings by another 28% in 2015 and 30% in 2016 from our base case scenario. Our TP is also reduced to Bt30.0/sh, HOLD.

IRPC Although IRPC’s earnings will be diluted the most in terms of percentage among refiners, we believe that investors trade IRPC on its upgrading programs, not on near-term earnings. We lower our target P/BV multiple from 1.2x to 1.1x, in line with refinery peers. Our new TP is Bt4.2. Maintain BUY.

Given the low earnings base, our bear case scenario will negatively lower IRPC’s earnings by 65% in 2015 and 70% in 2016 from our base case. This will lower our TP to Bt3.9/sh and our BUY recommendation is unchanged.

Source: DBS Bank

Industry Focus

SE Asia Oil & Gas

Changes to our estimates for stocks under our coverage to factor in new oil price assumptions

Core net profit ( previous base case)

Core net profit ( new base case)

Core net profit ( bear case)

Company Currency FY15F FY16F FY15F FY16F FY15F FY16F

PTTEP Btm 66,334 59,706 61,058 52,399 48,785 42,128

PTT Btm 94,546 93,966 89,840 87,819 83,256 81,755

TOP Btm 7,541 7,628 6,404 6,928 1,768 1,130

PTTGC Btm 29,667 29,384 29,001 28,695 26,150 25,352

BCP Btm 6,356 6,449 5,913 5,494 4,245 3,859

IRPC Btm 4,307 4,191 3,512 3,311 1,220 1,005

Source: DBS Bank

Table 3: TP and Recommendations Summary


Company Metric Multiple TP Rcmd Multiple TP Rcmd Multiple TP Rcmd

PTTEP FY15 PE 9.8x 164.0 HOLD 9.5x 146.0 FV 9.7x 118.0 Fully

valued

PTT FY15 SOTP - 366.0 BUY - 364.0 BUY - 330.0 HOLD

TOP FY15 PBV 1.3x 61.0 HOLD 1.1x 51.0 HOLD 1.1x 49.0 HOLD

PTTGC

FY15 EV/EBITD

A 6.0x 66.0 HOLD 6.0 64.0 HOLD 6.0 58.0 HOLD

BCP FY15 PBV 1.3x 37.0 BUY 1.1x 34.0 HOLD 1.1x 30.0 HOLD

IRPC FY15 PBV 1.2x 4.5 BUY 1.1x 4.2 BUY 1.1x 3.8 BUY

Source: DBS Vickers

Industry Focus

SE Asia Oil & Gas

Rigbuilders seeing slower orders Stock prices move with oil price. Stock prices of Singapore rigbuilders have strong correlation with oil price, with a coefficient of 0.8-0.9x. This is not surprising as the performance of rigbuilders tend to be driven by order momentum, which is dependent on the oil price. Base case: Lowering order win assumptions marginally to US$10b (2014) and US$9b (2015) for Singapore rigbuilders. Order flows for rigbuilders have been losing momentum over the past three months, in tandem with the softening oil price and exacerbated by the influx of new deliveries. Keppel and SMM have met three quarters of our full year

assumptions, but we are likely to see slower order wins ahead in view of the sizeable global rig orderbook and lower long-term oil prices. Hence, we are cut FY14 order win assumption by S$1bn to S$10bn (Keppel – S$5.5bn; SMM S$4.5bn) and expect a further slowdown to S$9bn (Keppel – S$5bn and SMM S$4bn) next year, in line with the 10-year average annual order wins of Singapore rigbuilders. To recap, excluding the exceptionally large orders from Petrobras in 2011/12, Singapore rigbuilders annual order win peaked at c.S$13bn in 2007 and 2011

. Annual order wins for Singapore Rigbuilders trended down in line with softened oil price

*2012 order wins from Petrobras totaled S$14.2bn; 9M14 order wins for Keppel includes 2nd FLNG contract worth over S$900m which is yet effective Source: Companies, DBS Bank

2.2 3.1 6.5 7.3 7.3 5.9

1.7 3.2

8.9

3.6 6.9

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4.2 3.1 5.4

5.7

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3.0

3.7

3.1

4.2

3.7

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20139M14

US$/bblS$ bn Annual order wins (Excl Petrobras order in 2011/12)

KEP order wins (LHS) SMM order wins (LHS) Oil price (RHS)

2.2 3.1 6.5 7.3 7.3 5.9

1.7 3.2

9.9 10.0 6.9

4.5 2.2

2.1

4.2 3.1 5.4

5.7

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3.7

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4.2

3.7

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120

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25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20139M14

US$/bblS$ bn Annual order wins

KEP order wins (LHS) SMM order wins (LHS) Oil price (RHS)

Industry Focus

SE Asia Oil & Gas

The rise of Chinese yards changes sector dynamics. Orders for jackup rigs reached a recent high in 2013 at over 80 new orders, compared to an average of 20-30 units annually. But order momentum started to slow down in 3Q14, which saw only three new orders or 10% of the 30 new orders YTD-2014. And of these, China grabbed the largest pie (46% of orders), while Singapore got 26%, and the remaining orders were secure by Middle East yards. Singapore rigbuilders used to command 60-70% market share in the jackup rig space. While Chinese yards are still far behind Singapore rigbuilders in terms of execution, timeliness and product quality, they have been securing jackup orders particularly from speculators and local operators. This has somewhat capped increases in newbuild prices and profit margins. Short-term supply glut with rig deliveries. Based on existing orderbooks, we expect to see 93 units of new

drilling rigs in 2015 and 70 in 2016, up from 65 units this year. It will take awhile for the market to absorb the new supply, which could pressure utilisation and day rates, and eventually, new order. Potential delays and cancellations at Chinese yards a silver lining. Chinese yards account for about 20% of the global rig orderbook (40% jackup and 30% semi-submersibles). We believe these orders are susceptible to delays or even cancellations given the Chinese yards’ patchy delivery track record, customer profile and balloon payment terms. Hence, actual deliveries might be lower than projected. There are bright spots. We are starting to see the return of FPSO orders with the rolling out of previously deferred projects. Floating LNG vessels are gaining popularity with booming LNG activities. The protected markets are also expected to be more resilient to oil price volatility.

Annual new orders and delivery schedule (global)

Source: Clarksons, DBS Bank

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Rig deliveries

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Rig orders

Jackup Semi‐submersible Drillship

Industry Focus

SE Asia Oil & Gas

Fine-tuning assumptions. In addition to downward revision in order win assumption mentioned earlier, we have also conservatively trimmed our margins assumptions for newbuiding projects by 0.5ppt in FY15-16 factoring potential risks of customers delaying

delivery. In the case of Sembcorp Marine, we have also lowered repair revenue by around 5-10% in FY15-16. For Cosco, we have revised down order win assumption from US$2.5bn to US$2.0bn per annum in FY14/15.

Revised estimates after factoring in new oil price assumptions

Core net profit (previous base

case)

Core net profit (new base case)


Company Currency FY15F FY16F FY15F FY16F Chg Chg FY15F FY16F Chg Chg


Keppel S$ 1,629 1,754 1,604 1,670 -2% -5% 1,597 1,605 -2% -8%

SMM S$ 669 764 638 700 -5% -8% 629 656 -6% -14%

Cosco S$ 68 81 63 70 -7% -13% 63 62 -7% -24%

Source: DBS Bank

Industry Focus

SE Asia Oil & Gas

Prefer Keppel Corp. Keppel Corp. has a diverse product range, market leadership, and established presence in protected markets. For SMM, key concern lies in the execution of Brazilian projects at their new Brazil yard. We downgraded O&M PE multiple from 16x (+1SD) to 13x (mean), given the prospect of a declining order trend on the back of expectations for weaker oil prices in the medium term. Despite the earnings and cut in valuation, Keppel Corp and SembCorp Marine remains a buy, with decent upside, as share prices of both stocks have overshoot on the downside due to panic selling on oil prices decline. Bear case – earnings cut by -8% to -14% : Our stress in a bear case scenario where oil prices drops to US$75/b for a sustained period, this could lead to oil majors cutting back exploration budgets and defer ultra deep water exploration projects where returns will be marginal. In this scenario, we

will cut new order win assumptions to US$7b for Singapore rigbuilders. Competition will intensify further, from Koreans and Chinese shipyards, unless there’s a recovery in shipbuilding. This could lead to fall in newbuild prices and impact profits margins. The risks of rescheduling and cancellations by speculators will rise. The cut in earnings on FY16 will be more drastic , at -8% to -14% for Singapore listed rigbuilders. … valuation could drop to -1 SD. Under this scenario, this could trigger a further de rating of the stocks to -1 SD, or about 9.6x multiples, which occurred during the post GFC lull period in 2010 and 2011 when new rig orders had yet to recover. Fair value of Keppel and SMM will be S$9.34 and SMM at $3.05, which will provide support levels for these stocks.

Average PE valuation for Singapore rigbuilders

0.0

5.0

10.0

15.0

20.0

25.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-1sd: 9.6x

-2sd: 6.6x

+1sd: 15.5x

+2sd: 18.4x

Avg: 12.5x

Source: Bloomberg Finance L.P. , DBS Bank Summary of changes in valuation methodology, target price and recommendation


Company Last Px (17 Oct) Metric Multiple TP Rcmd Multiple TP Rcmd Multiple Support


Keppel 9.46 SOTP 16x 12.60 BUY 13x 11.10 BUY 10x 9.34

SMM 3.62 SOTP 16x 4.82 BUY 13x 4.00 BUY 10x 3.05

Cosco 0.60 P/Bv 1.15x 0.69 FV 1.0x 0.62 FV 0.8x 0.50

Source: Bloomberg Finance L.P., DBS Bank

Industry Focus

SE Asia Oil & Gas

OSV cycle will not be affected to a great extent but growth could slow down Falling oil prices have taken the shine off oil services companies over the last few days despite historically low correlation. While the pace of decline in oil price to below US$90/bbl has been quite surprising, most offshore projects (including deepwater) will continue to be viable at US$70-80/bbl. Of course, given the decline in profitability, some projects may be delayed and charter rates for rigs and support vessels may come under pressure if the low oil price environment sustains well below US$70/bbl. Built to order shipbuilders are likely to be affected significantly, while demand and pricing for built to stock vessels may come off to an extent as well. However, overall, we believe such a strong sell off for O&G services stocks is somewhat unwarranted as the absolute oil price by itself doesn’t directly impact oil services providers in isolation, without considering the demand-supply dynamics of the industry. Share price correlation with oil price since listing

Companies Correlation Comments

Ezion 0.40 OSV players and O&G service providers are less sensitive to oil price movements, especially those who are engaged more in the production phase and shallower water segment

Pacific

Radiance

-0.51

Nam

Cheong

-0.68

Source: DBS Bank Offshore support vessel market has recovered well but the upcycle could be somewhat weaker than previously expected. Since 2013, we have seen a gradual recovery in the offshore support vessel (OSV) market with improvements in utilisation and stronger vessel day rates, on the back of tightening demand-supply indicators. While the supply side of the equation still remains benign compared to the last major drop in oil prices following the financial crisis in 2008-09, we may need to take a slightly more cautious view on demand growth from here. Growth in contracted offshore rig count could slow down. In line with increasing offshore activity, contracted offshore rig count (a key indicator of end-demand for OSVs) has increased to 732 units, a 14% increase since the beginning of 2012. This compares to 12% growth in the combined global AHTS/PSV fleet over the same period. From now till end 2015, the offshore rig fleet is expected to grow by another 19% as newbuilds are delivered, compared to 13% growth of the combined global AHTS/PSV fleet over the same period. However, with the fall in oil prices and potentially lower level of exploration programmes, there could be slippages and cancellations of the rig fleet under construction, which could lower the effective growth in contracted rigs to low-mid single digit levels. This is exacerbated by the fact that roughly 40%

of the global rig fleet is being built at Chinese yards, some of which do not have a long track record in this space. Growth in contracted rig count – will it taper off hereon?

Source: DBS Bank Not expecting a major swing in OSV supply-demand dynamics. Even with a lower growth in the rig fleet, we are likely to see sequentially stable to improving vessel-to-rig ratios for the PSV and AHTS fleets going forward, as well as stable-to-declining orderbook-to-fleet ratios for PSVs and AHTS over 2015-2016. We anticipate less than 5% supply growth per year for offshore supply vessels, which should not be a big dampener to the market. AHTS to rig ratio if current rig delivery schedule holds

Source: DBS Bank AHTS to rig ratio assuming delays in rig delpoyments

Source: Clarkson Research, ODS Petrodata, DBS Bank

1.6

1.8

2.0

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2.4

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3.4

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of v

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ls to

rigs

(x)

AHTS (<8,000 BHP) vs. jackups AHTS (>8,000 BHP) vs. Floaters

Total AHTS to rigs

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Total AHTS to rigs

Industry Focus

SE Asia Oil & Gas

Orderbook to fleet ratio for OSVs remains benign

Source: DBS Vickers Replacement demand should continue to drive demand for OSVs as well. There will be a growing fleet of idle vessels that are >25 years old in the market owing to the divergence in utilisation rates between newer and older vessels, supporting the asset replacement demand theme. End-users will increasingly l favour younger and more reliable tonnage, resulting in the idling of older units (>25 years). Further, older assets could present greater risk of equipment failure and compromise safety during operations offshore. In contrast, younger vessels are less prone to technical issues that could lead to costly vessel downtime and high maintenance and repair costs. This translates into higher efficiency and utilisation rates for both vessel owner and charterer. Thus, built-to-stock shipyards should continue to do reasonable business in the lower end tonnage market as most of the older vessels are in the shallow water market. 25% of global OSV fleet considered obsolete

Source: ODS Petrodata, Tidewater Steady outlook for shallow water maintenance vessels and others exposed to production side of the value chain. Demand for accommodation vessels and other maintenance related vessels like liftboats are expected to be relatively quite stable, as these vessels are required in the production phase and there is ongoing demand irrespective of oil price volatility to a large extent. Demand is expected from aging platforms, as a platform ages it requires a greater level of Inspection, Repair

and Maintenance (IRM) works. Once offshore platforms are installed, the equipment is surveyed and maintained, and there is an ongoing requirement for IRM work during the life of an offshore oil and gas field. We expect the growth of this space to be driven by the development of new facilities in the shallow to midwater segments, expansion of existing installations, and increased repair/maintenance activity on aging offshore oil and gas fields as clients impose increasingly stringent requirements on operational safety. For our coverage, we now have more conservative growth assumptions in line with lower base case oil price assumption. With the rig charter market expected to be weak, there could be delays and cancellations of some speculative units, and as such, the expected growth in rig fleet could be down to low-mid single digit growth from current expectation of 8-9% as highlighted earlier. Hence, we will lower our OSV utilisation expectations to 75-80% from c.85% earlier, and assume rates for AHTS and PSV vessels decline by about 3-5% p.a. while rates for subsea vessels and accommodation vessels remain stable, as before. Margins may be affected to an extent as a result. For built-to-stock shipbuilders of OSVs, there could be some slippage of orders while the going will get tougher for built-to-order shipbuilders. For conventional offshore support vessel owners like AHTS and PSVs, the oil price decline does not coincide with a demand-supply imbalance unlike 2009-10, and hence, charter rates should not crash as charter rates currently are not that high to begin with. Also, investments in shallow water fields in protected markets of Malaysia and Indonesia are unlikely to be affected significantly, hence companies like Wintermar, Logindo and Pacific Radiance should face less earnings risks. However, both Pacific Radiance and POSH have significant newbuild deliveries scheduled over the next 2 years, which if not employed gainfully, will lead to lower growth expectations. In the extreme bear case scenario, the impact would be more critical. Under a prolonged low oil price scenario <US$75/bbl, growth in chartered rig fleet could be negative. Production levels could also be cut and maintenance deferred. Hence, in that case, we will lower our OSV utilisation expectations from to 70-75% from 85% currently, and assume rates for AHTS and PSV vessels to decline by about 5-10% p.a., and rates for subsea vessels and accommodation vessels to decline about 5% p.a. Margins will be more significantly affected in this case. Both built-to-stock and built-to-order shipbuilders will be significantly affected.

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

Jan-

96

Jul-9

7

Jan-

99

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9

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Jan-

14

AHTS PSV

Industry Focus

SE Asia Oil & Gas

The changes in assumptions and changes in earnings estimates for both our new base case oil price estimate as well

as the bear case scenario are summarised in tables.

Summary of changes in earnings assumptions for Singapore & Indonesia oil & gas services stocks

Core net profit

( previous base case) Core net profit

( new base case) Core net profit

( bear case) Company Currency FY15F FY16F FY15F FY16F Chg Chg FY15F FY16F Chg Chg

Ezion US$ 300.4 349.4 300.4 349.4 0% 0% 269.4 311.5 -10% -11%

POSH US$ 165.9 172.4 145.0 147.8 -13% -14% 129.8 129.9 -22% -25%

PACRA US$ 83.9 97.0 77.9 89.5 -7% -8% 73.1 80.7 -13% -17%

Mermaid US$ 53.1 63.7 49.6 57.9 -6% -9% 45.8 52.7 -14% -17% Nam Cheong RM 309.6 275.2 266.0 267.8 -14% -3% 263.0 217.7 -15% -21%

Vard NOK 481.6 510.1 481.6 510.1 0% 0% 430.6 408.8 -11% -20%

Wintermar US$ 37.4 42.7 34.8 38.2 -7% -10% 29.9 34.6 -20% -19%

Logindo US$ 29.3 34.4 25.6 29.2 -13% -15% 24.8 23.5 -15% -32%

Source: DBS Bank estimates Most stocks look oversold at these levels. While we have cut earnings for FY15/16F by about 5-15% for our portfolio of O&G services stocks in Singapore and Indonesia as seen above, we believe most stocks are oversold at current levels if our new base case oil price scenario is achieved over the near to medium term (with a rebound from current low levels to average between US$92-95/ bbl in 2015-16). Even with lower earnings and lower valuation pegs (using mean valuation levels), we continue to maintain our BUY calls for Ezion, POSH, Pacific Radiance, PT Logindo, Nam Cheong and Mermaid. We downgrade Wintermar Offshore Marine to HOLD on account of elevated valuations after accounting for possibly slower earnings growth. We have already downgraded Vard recently in a separate report to account for

its exposure to deepwater offshore activity as well as company specific execution issues. However, if we were to take a bleaker view of the situation and assume a bear case oil price scenario, we would use a valuation peg of -1 std dev from mean valuations and in addition with lower earnings estimates, we believe some of the stocks in our coverage could be vulnerable to further price erosion in such a case. We highlight the bear case share price support levels in the table below. While sector PE had dipped to -2 S.D. levels during the last financial crisis, we do not expect a repeat of the same as supply –demand dynamics of the sector are much better than in 2009, when there was a huge orderbook of OSVs waiting to be delivered over the next few years.

Summary of changes in valuation methodology, recommendation and target price.

Previous Base Case New Base Case Bear Case Scenario Company Last Px Metric Multiple TP Rcmd Multiple TP Rcmd Multiple Support

Ezion 1.47 FY14/FY15

PE 12x 2.40 BUY 10x 2.00 BUY 8x 1.50

POSH 0.68 FY15 PE 10x 1.15 BUY 10x 1.00 BUY 7x 0.63

PACRA 1.085 FY15 PE 11x 1.62 BUY 10x 1.36 BUY 7x 0.90

Mermaid 0.31 FY15 P/B 1.1x 0.57 BUY 0.9x 0.46 BUY 0.7x 0.36 Nam Cheong 0.395

FY14/FY15 PE 10x 0.52 BUY 10x 0.48 BUY 7x 0.33

Vard 0.66 FY15 PE 8x 0.65 FV 8x 0.65 FV 7x 0.51

Wintermar 1160 FY15 PE 15x 1600 BUY 12x 1190 HOLD 10x 860

Logindo 4200 FY15 PE 12x 6350 BUY 11x 5080 BUY 10x 4470


Industry Focus

SE Asia Oil & Gas

Sector PE and P/BV valuation levels for Singapore O&G services space

Source: Bloomberg Finance L.P., DBS Bank Overall, among our coverage of offshore oil & gas service stocks in Singapore and Indonesia, we prefer those which have more exposure to the production side of the value chain, longer term contract coverage, and more exposure to National Oil Companies (NOC) and less exposure to deepwater exploration activities. We reckon these stocks will be a better bet to ride out the current volatility. In this aspect, Ezion stands out with its long term contracts as well as exposure to accommodation/ maintenance requirements of producing fields. Other OSV stocks have varying degrees of exposure to exploration vs. production, shallow water vs. deep water, and NOC vs. IOC customers, as seen in the table below.

We also identify a few criteria to help select our top picks in the current volatile environment – i) exposure to the less cyclical parts of the E&P value chain – shallow water/ production/ national oil company customers/ cabotage markets, ii) high orderbook/ revenue visibility, iii) low earnings execution risks, iv) healthy balance sheet and funding position and v) cheaper valuations than peers or historicallyy. Based on these criteria, our top picks for the Singapore market are: Ezion, Pacific Radiance and Nam Cheong. We would avoid Vard in the near term, and also prefer Logindo over Wintermar in the Indonesian OSV space on cheaper valuations.

Estimates of exposure of O&G services stocks to different parts of the E&P value chain





% of FY15 earnings secured by orderbook

Company exploration production shallow water

deep water

NOC related

IOC & others

Ezion 10% 90% 100% 0% 60% 40% 3.1x 95% POSH 34% 66% 49% 51% 55% 45% 0.8x 60% PACRA 52% 48% 90% 10% 10% 90% 0.7x 50% Mermaid 43% 57% 100% 0% 55% 45% 2.0x 50% Nam Cheong 44% 56% 100% 0% 50% 50% 1.0x 50% Vard 15% 85% 10% 90% 30% 70% 1.7x 75%

Wintermar 57% 43% 87% 13% 30% 70% 0.7x 50% Logindo 56% 44% 76% 24% 30% 70% NA NA


0

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15

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25

2007 2008 2009 2010 2011 2012 2013 2014

(x)

Avg: 10.5x

+2sd: 18x

+1sd: 14.3x

-1sd: 6.7x

-2sd: 2.9x

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(x)

Avg: 1.3x

+2sd: 2.9x

+1sd: 2.1x

-1sd: 0.5x

Industry Focus

SE Asia Oil & Gas

Criteria for selecting our top picks in the space and score for companies in our coverage

Company






Ezion Yes Yes Yes Yes 4

POSH Yes Yes 2

PACRA Yes Yes 3

Mermaid Yes Yes 2 Nam Cheong Yes Yes Yes 3

Vard Yes 1

Wintermar Yes Yes 2

Logindo Yes Yes Yes 3


Industry Focus

SE Asia Oil & Gas

Protected market - Malaysia is more resilient Existing offshore activities will power on. At the base case assumption of USD95/barrel, the majority of production fields in Malaysia are profitable and therefore we view that there will be no impact to any ongoing operations. This even goes for deepwater fields with vast reserves like Kikeh, or Gemusut-Kakap and even the up and coming Malikai-Kebabangan fields. As for new exploration activities and enhanced oil recovery (EOR) initiatives, we expect these to be ongoing as well at the base case price. We say this confidently because many long term charters have been tendered out in Malaysia recently, some of up to 5 years to ensure that an active level of drilling is maintained. We view that PETRONAS’s interest is deeply entrenched towards maintaining and boosting Malaysia’s production levels of oil and gas, and it is not likely to drastically change development plans with crude oil still at healthy levels. But, more waiting and margin squeeze for new projects. All that said, new projects will be nonetheless challenging for service providers as PETRONAS and other Production Sharing Contractors (PSCs) in Malaysia seek to lower production costs. For new projects currently in tendering stages, we view that PETRONAS will also take current market weakness as an opportunity to further lengthen the roll out timeline of tenders. This has so far been seen for Malaysia’s second EOR megaproject called the Baram Delta Gas Gathering Project 2 (Bardegg2) and Baronia EOR. Previously slated for award in mid-2014, PETRONAS has recently extended the timeline to Dec 2014. Other project tenders which are likely to see a further tendering timeline extension are Bokor EOR and marginal field projects like SK307.

There is good news! Many Malaysian service providers will be able to weather the current storm, we believe, should PETRONAS decide to delay its new development plans. This is because orderbook flow has been at a record high for Malaysian service providers over the last 18 months, leaving companies with healthy book-to-bills. Furthermore, a large percentage of these orders have been long term service contracts with timelines of 5 years (maintenance, HUC and also installation) and in some cases up to 12 years (FPSO contracts). Because of this, we take the view that earnings visibility (at least over a 12 month period) for the majority of our Malaysia coverage will remain intact. The table below illustrates the quantum of contracts awarded to Malaysian listed service providers since 2011. Note the significant pick up from 1Q13 onwards.

Top picks. Post some minor earnings adjustments to factor in more conservative assumptions, as well as downward adjustment to our valuation targets, we continue to find deep value for several Malaysian stocks. Our top picks following this recent sell-down are SapuraKencana, Bumi Armada and Dayang Enterprises. SapuraKencana’s current share price has wiped out all value created from their Newfield acquisition which we view is not justified. These assets continue to be earnings accretive even with lower crude oil prices furthermore, recent gas discoveries further boost its potential. SapuraKencana has a RM25bn orderbook which provides solid earnings visibility for 12-24 months. Similarly for Bumi Armada, as earnings are backed for 5-10years from long term fixed FPSO contracts amounting to RM22bn. Including optional extensions, Bumi Armada’s orderbook balloons further to RM32bn. As for Dayang Enterprises, we like the stock as it is exposed to the maintenance market therefore making its earnings profile very resilient. An orderbook of RM4.5bn provides Dayang with record earnings for the next 2-3 years.

Quarterly contract flow for Malaysian listed oil & gas services providers

Source: Companies, Bursa Malaysia, Media, AllianceDBS

Industry Focus

SE Asia Oil & Gas

How our assumptions for various companies will be affected by lower oil prices

Segment/ sub-segment New base case scenario Bear case scenario

Companies SapuraKencana The key downside risk to SAKP’s earnings in this

scenario is lower profits from its production activities. We lower our earnings by 3-5% to capture lower crude oil assumptions going forward. We view that their other operating segments like drilling, transport & installation and also marine services will continue as per normal, driven by the group’s RM25bn orderbook.

In this scenario, we have concerns on SAKP’s deepwater exposure in its T&I business. 3 of their deepwater and heavy lift capable installation vessels are dependent on spot charter installation jobs. Besides this, there might be sluggish demand in the drilling segment for the company’s semi-submersible tender rigs.

Bumi Armada Our view is that there are no changes to Bumi Armada’s FPSO, T&I and OSV division in this scenario. To be conservative, we nonetheless tune down overall OSV utilisation from 85% to 80% to reflect sluggish chartering especially in the deepwater market.

We still view that the FPSO business will continue unchanged at these levels given the backing of long term charter contracts. However, there would be more risk to utilisation rates of Bumi Armada’s SURF assets and OSVs. Utilisation for subsea service vessels may have to be lowered to 50% while OSV’s 70%.

MMHE As it is, MMHE’s orderbook is running low and we have factored a slow orderbook replenishment scenario into our earnings. We have also attempted to price in softer margins going forward as the fabrication scene has become increasingly competitive.

This could mean even lumpier earnings outlook for MMHE going forward and potential for the group to dip into losses during certain quarters. We may look to making further downgrades to our earnings outlook.

UMWOG No changes to UMWOG’s rig fleet utilisation and charter rate assumptions in this scenario. As it is, our assumptions already factor in declining charter rates.

We would look to further cutting our charter rates by at least 10%, closer to the USD140k/day levels and lowering fleet utilisation from the current 100% to 80%.

Dialog Overall no changes to our assumptions on Dialog in this scenario. Onshore developments in Pengerang will continue and is not likely to impact its risk service contract either.

In this scenario, we would still make no changes to the group’s tank terminal operations. However, there could be a moderation in drilling mud sales and also some slowdown in their offshore developments like Bayan field and other recent farm-ins from ROC oil.

Dayang No changes to our assumptions on Dayang in this scenario as they are backed by long term contracts from PETRONAS and other PSCs for maintenance related activities.

We continue to expect resilient earnings in this scenario as Dayang is involved in maintenance and ongoing production related activities. To be conservative though, we assume some slowdown in activities on their call out HUC contracts.

Coastal We assume some slippage for Coastal’s built-to-stock programme to be on the conservative side. We also postpone the rig charter to 2Q15 from 1Q15.

In this scenario, besides more slippage in the built-to-stock programme, there is risk for Coastal’s first rig to secure a timely charter at favourable rates as well. We would look to further delaying the charter timeline and rate.

TH Heavy Similar to MMHE, TH Heavy’s orderbook is also running vicariously low with <1x book to bill. The group is already currently loss making based on its existing projects and we make a second cut to earnings given the slowdown in new order flows and the competitive fabrication landscape.

This situation would be further detrimental to TH Heavy and will likely raise concerns on the group’s fund raising ability as it has negative cash flows. Recall that TH Heavy has a USD1.2bn FPSO contract which requires USD150m of capex for conversion.

Deleum No changes to Deleum’s turbo machinery services and slickline services as these are backed by long term contracts. They also deal with more production related activities than exploration.

There may be slight weakness in the slickline division for the group’s call-out units.

Pantech To be conservative, we lower FY15 (Feb FYE) earnings slightly to factor in sluggish offshore demand for pipes, valves and fittings (PVF). No changes for FY16.

A further lowering of offshore PVF demand for their trading business is expected. However, this might be offset by a strong orderflow from onshore building activities in Pengerang.

Source: AllianceDBS

Industry Focus

SE Asia Oil & Gas

Table 1: Which stocks are more resilient and why





% of FY15 earnings secured by orderbook

Company exploration production shallow water

deep water

NOC related

IOC & others

SapuraKencana 10% 90% 60% 40% 70% 30% 2.4x 100%

Bumi Armada 10% 90% 80% 20% 20% 80% 10x 80%

MMHE 0% 100% 60% 40% 60% 40% 0.7x 60%

UMWOG 100% 0% 90% 10% 80% 20% 1.5x 85%

Dialog 0% 100% 0% 10% 80% 20% n/m n/m

Dayang 0% 100% 100% 0% 30% 70% 3.5x 90%

Coastal 50% 50% 60% 40% 0% 100% 2.2x 80%

TH Heavy 0% 100% 100% 0% 60% 40% 0.5x 50%

Deleum 20% 80% 100% 0% 60% 40% 5.1x 100%

Pantech 0% 70% 60% 0% 30% 70% n/m n/m

Table 2: Changes to our estimates for stocks under our coverage to factor in new oil price assumptions

Core net profit (previous base case)

Core net profit (new base case)


Company Currency FY15F FY16F FY15F FY16F FY15F FY16F

SapuraKencana RM 1506.7 1675.6 1429.1 1606.2 1354.9 1318.4 Bumi Armada RM 655.4 857.8 640.5 849.3 606.1 794.9

MMHE RM 180.6 196.7 147.5 150.5 117.4 93.6

UMWOG RM 406.9 447.3 406.9 447.3 352.4 380.4

Dialog RM 253.4 276.2 253.4 276.2 240.7 251.1

Dayang RM 209.0 223.9 209.0 223.9 179.3 193.2

Coastal RM 221.1 253.5 204.8 250.2 181.5 217.6

TH Heavy RM 57.5 76.1 42.7 62.0 15.0 28.1

Deleum RM 67.9 73.7 67.9 73.7 66.5 71.7

Pantech RM 59.0 75.5 56.8 75.5 55.5 69.0

Table 3: TP and Recommendations Summary


Company Metric Multiple TP Rcmd Multiple TP Rcmd Multiple TP Rcmd

SapuraKencana FY16 PE 22x 5.55 Buy 20x 5.41 BUY 18x 4.00 BUY Bumi Armada SOP - 2.55 Buy - 2.30 BUY - 2.10 BUY

MMHE FY15 PE 20x 2.25 FV 18x 1.65 FV 16x 1.20 FV

UMWOG FY15 PE 22x 4.15 Buy 22x 4.15 BUY 18x 2.90 Hold

Dialog SOP - 1.65 Hold - 1.65 Hold - 1.55 Hold

Dayang FY15 PE 18x 4.55 Buy 15x 3.80 BUY 13x 2.83 Hold

Coastal FY15 PE 15x 6.00 Buy 15x 5.55 BUY 13x 4.30 BUY

TH Heavy FY15 PE 15x 0.95 Hold 13x 0.51 Hold 10x 0.39 FV

Deleum FY15 PE 13x 2.2 Hold 11x 1.9 Hold 10x 1.66 Hold

Pantech FY16 PE 13x 1.55 Buy 13x 1.55 BUY 11x 1.18 BUY

Source: DBS Vickers

Industry Focus

SE Asia Oil & Gas

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STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

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FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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Industry Focus

SE Asia Oil & Gas

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