(EnergyAsia, May 20 2011, Friday) — Norwegian bank DnB NOR remains bullish on the outlook for the offshore and marine sector in Southeast Asia, with a ‘buy’ rating on eight out of 15 companies with stocks that it is tracking on the exchanges of Singapore, Malaysia and Norway.

In a recent report, analysts Kay Lim, Thor Andre Lunder and Simon Jong said they expect the sector’s strong momentum to continue through 2011 from the fourth quarter of last year as more offshore oil and gas projects are executed.

The report placed ‘buy’ ratings on the stocks of STX OSV Holdings, Ezion Holdings, Jaya Holdings, KS Energy, Swiber Holdings, CH Offshore, ASL Marine and Kreuz Holdings. It called for a ‘hold’ on Keppel Corp and EOC Limited, and recommended selling five stocks, SembCorp Marine, Kencana Petroleum, SapuraCrest Petroleum, EZRA Holdings and Otto Marine.
Apart from Kencana Petroleum and SapuraCrest Petroleum which are listed in Malaysia and EOC Limited in Norway, the companies are all traded on the Singapore Exchange.
The report said: “Activity level grew 15% quarter-on-quarter in the fourth quarter of 2010 with stable margins. We reiterate our view that 2011 will be a year of inflection, with activity level gaining momentum in the second half, absorbing the excess tonnage in the market.

“Over a longer time horizon, we expect OSV rates and utilisation to increase notably in 2012. We believe that asset prices (vessels and share prices) should develop ahead of the rate cycle, but do not believe that the market has discounted this in today’s valuations. Hence, we are watching the vessel price trend closely for signals to the overall health of the sector.

“We expect demand in the sector to increase and gather strength along with activity level in H2 2011, as offshore projects (driven by E&P spending) initiated late last year and early this year will be kick-started. Hence, the excess tonnage situation in the market will improve in time to come.

Improving ratio of OSV to one installation (rigs, FPUs, platforms, and FPSOs). With the ratio of OSV to one installation expected to peak in 2011, we expect demand to pick up significantly in 2012, driven by the influx of new rig units (rig supply) entering the market requiring OSV support, healthier demand/supply balance in OSV fleet as there were lower post-crisis vessel orders, and higher activity level from growth in E&P activities. We believe the market would be able to absorb the enlarged OSV fleet by 2012.

“The offshore cycle took a deep dive in 2009, in line with the global financial crisis. However, given that the downturn lasted for a relatively short period of time, with recovery mode kicking in within two years in 2010, most vessel owners went through the crisis relatively unscathed. It was a reason for the lack of distressed opportunities in the market.

“Some vessel owners have also built up a relatively strong balance sheet, supported by the supernormal contracts fixed during the good times. Hence, we believe that the asset pricing environment is looking at an inflationary trend, with increasing prospects of more vessel owners timing this cycle and increasing their fleet.

“There is an increasing number of offshore supply and seismic companies globally seeking to expand or upgrade their fleet. The outlook for the high-end OSV segment is brighter than other sub-segments, supported by factors highlighted in subsequent sections of this sector update.

“On average, the shares of the offshore companies under our coverage (BUY recommendations) are trading at 31% discount to our NAV. We believe that the current asset pricing offers high margin of safety for equity investment in selected offshore companies. Based on recent vessel transactions and our proprietary valuation models, we are confident that vessel prices are more likely to trend up rather than down for the next phase of the cycle.

“However, asset prices are not expected to breach the highs in the previous upcycle, as pressure is still expected from the available supply in the market. Nevertheless, the expected uptrend in prices would bolster the confidence of the market and asset owners.