UOB Kay Hian analyst Adrian Loh has upgraded his recommendation on the offshore & marine (O&M) sector to “overweight” due to growth in competitive utilisation for offshore rigs, which are approaching pre-pandemic levels.

Loh’s upgrade also comes as activity in the industry is expected to pick up in 2022.

“Should activity in the oil and gas industry strengthen, leading to a revival in the offshore & marine industry, we could see a cyclical upturn begin in the next six to 12 months. This assumes that the current wave of Covid-19 infections globally is dealt with in a reasonably quick manner and that governments are able treat the virus as an endemic,” he writes in a Sept 27 report.

“Looking at future projects, the demand for production assets appears to have meaningful upside in the next few years which could have positive ramifications for both Keppel Corporation and Sembcorp Marine (SembMarine),” he adds.

According to independent energy research company Rystad Energy, up to US$70 billion ($94.73 billion) of offshore oil projects could be sanctioned by 2023 with another US$50 billion of offshore gas projects sanctioned by 2024.

Furthermore, oil prices are likely to rise to US$100 per barrel in the medium term as the lack of human resources and lower industry capital expenditure (capex) could curtail oil supply in the face of demand recovery from 2022 to 2025.

Looking back at the past six months, the forward Brent oil price for 2025 delivery has risen from US$54 per barrel to US$60 per barrel, and is more supportive of the oil industry capex, notes Loh.

While oil companies have yet to respond, Loh feels that “with higher free cash flow generation in 2021, we expect industry capex to pick up going forward.”

To this end, Loh’s top picks for the O&M sector – Yangzijiang, Keppel Corporation and SembMarine – have remained the same.

“Yangzijiang (YZJ) should see margin expansion from 2HFY2021 onwards and also potentially list its debt investments business,” he writes.

Keppel Corp is also another keeper in Loh’s books “due to its undemanding valuations and potential positive news flow regarding the merger of its O&M business unit”.

“In addition, we believe that SembMarine’s risk-reward appears skewed to the upside post its recent successful $1.5 billion rights issue,” he adds.

Loh has given “buy” calls for Yangzijiang, Keppel and SembMarine with target prices of $2, $6.48 and 11 cents respectively.

He has also rated Sembcorp Industries “buy” with a target price of $2.59.

Despite the downgrades to earlier forecasts, Loh says oil demand is still expected to show a V-shaped recovery in 2021.

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UOB Kay Hian upgrades offshore & marine sector to 'overweight' as industry activity expected to pick up in 2022

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