• Operations challenging
• Oil price recovery a bumpy road
• Seeking to keep existing work

Rally in Apr has fizzled out

Many oil and gas stocks saw a rally in early Apr as oil prices were supported by geopolitical tensions in the Middle East, and investors also took to bargain hunting with depressed valuations of stocks in the sector. This rally lasted about two to three weeks, and the momentum has fizzled out for now. Certain stocks that were previously trading at unjustifiably low valuations have seen their prices holding up well ever since, while others have given up most of their gains.

1Q15 harbinger of more challenging times ahead

On the operational front, many companies continued to see deterioration in outlook and business profitability. Unsurprisingly, 1Q15 had many companies reporting earnings that were lower versus a year ago, and many were in fact below ours and the street’s expectations. Out of the 13 Oil & Gas/Offshore & Marine stocks under our coverage, most were below expectations and none performed above expectations.

Utilisation over rates; defending existing order books

In the Offshore Support Vessel (OSV) segment, vessel owners are prioritizing utilisation rates over charter rates, and even then, they are facing rising pressure to maintain utilisation rates. Those with stronger balance sheets are waiting to scoop up distressed assets, and we believe that more opportunities may present themselves in the months ahead. Meanwhile, many owners are also implementing cost-cutting measures. With vessel owners holding pessimistic views on the chartering market, shipbuilders and rigbuilders would have to rely on their order books for now, and seek to defend the existing order book in the hope that there are few order delays, discounts, or cancellations.

Maintain NEUTRAL on broader sector

The industry downturn is starting to show more clearly the individual characteristics of the various sub-sectors, as well as the business models of different companies. So far, the most resilient in terms of earnings has been Ezion Holdings [BUY, FV: S$1.55], and the liftboat segment is still one of the relatively brighter spots of the sector in terms of demand. As such, investors may also want to consider Triyards Holdings [BUY, FV: S$0.60]. Maintain NEUTRAL on the broader sector.

Source: OCBC Research - 22 May 2015