Brokers' take

Singapore oil and gas sector

DBS Group Research, March 15

Most companies reported disappointing Q415 results, save for Keppel ("hold"; TP: S$5.25), as a result of a wave of impairments and provisions, which swung Sembcorp Marine (SMM)("Fair value"; TP: S$1.24), Cosco ("Fair value"; TP: S$0.24), Mermaid Maritime (Mermaid) ("Fair value"; TP: S$0.09)and PACC Offshore (POSH) ("Hold"; TP: S$0.28) to deliver substantial full year losses. We believe that Ezra ("Hold"; S$0.08) is most likely to see impairments in 2016, as it has made none so far. Keppel could be under pressure to make provisions for non-Sete Brasil projects of up to S$200 million, amid rising deferment/cancellation risks. Cosco continues to face cost overrun issues. SMM seems to have made adequate provisions for non-Sete projects (S$280 million in Q415) but risks of further provisions for Sete projects remain. Meanwhile Ezion ("Buy"; TP: S$0.85), Mermaid, PACRA ("Fair Value, TP: S$0.25) and Yangzijiang ("Buy"; TP: S$1.25) are the least likely to see further impairments, after the recent round of aggressive write-downs. In these difficult times, we have seen companies: i) undertake cost-cutting measures, ii) defer vessel deliveries (PACRA, POSH, Ezion, Emas Offshore), and iii) hatch plans to diversify beyond the oil & gas markets (Ezion and Vard). We think companies that have adopted these strategies are better positioned to ride out the downturn. Additionally, those with low gearing and little-orno upcoming non-bank debt repayments, such as POSH and Mermaid, should be less at risk.