Regional Industry Focus

Offshore & Marine Refer to important disclosures at the end of this report

DBS Group Research . Equity

Bracing for a new wave of M&A 

Base forecast for Brent crude price : US$55-65/bbl in 2015 and US$65-75/bbl in 2016



Downside risks priced in; watch for inflexion points



Theme #1: Survival of the fittest – Ezion



Theme #2: M&A plays – Ezion, Ezra, Triyard, DynaMac, BakerTech, SapuraKencana and Dayang

Watch for 2H recovery. Our new base case forecast for Brent crude price for 2015/2016 are US$55-65/bbl and US$6575/bbl respectively. Volatility will prevail in the near term, though we expect some rebound in prices in 2H as production cut filters through. Downside risks priced in; watch for inflexion points. Most of the bad news is known already - capex cuts, declining rig counts, falling charter rates and utilisation, contract terminations /renegotiations, and earnings disappointments. The spiralling effect is likely to continue in the next few months, but these may be largely been priced in. The key inflexion point is production cuts expected from 2H15. Empirically, the supply side of the equation has a bigger bearing on oil price recovery following the steep slide. Investment theme #1 Survival of the fittest: We devised a scorecard to determine the long term winners among smaller cap OSV providers who would be able to better withstand the current climate, in conjunction with current valuation levels (details inside). We prefer players with exposure to the resilient shallow water segment and production phase, and have a sound strategy, favourable asset mix, proven track record, and healthy balance sheets. Our top pick is Ezion. Quality OSV operators like POSH and Pacific Radiance should be among the first to benefit in an oil price rebound scenario but near term earnings are expected to remain weak, thus limiting share price upside potential. Investment theme #2 M&A plays: The plunge in oil prices is set to fuel another wave of mergers and acquisitions, as major players shed non-core assets and smaller companies merge in an attempt to scale up and survive. We identify some potential takeover targets to be Ezion, Dyna-Mac and Ezra Group companies like Triyards and EMAS Offshore. In Malaysia, SapuraKencana and Dayang are on acquisition trails. Companies with high cash hoards such as Baker Tech are good privatisation candidates. We do not rule out M&A possibilities among Singapore shipyards to boost competitiveness amidst rising competition from Korea and China.

www.dbsvickers.com ed: JS /TH / sa: TW

20 Apr 2015

For an in-depth sector discussion, please click here

Analyst Janice CHUA +65 6682 3692 [email protected]

Suvro SARKAR +65 6682 3720 [email protected]

HO Pei Hwa +65 6682 3714 [email protected]

Arhnue TAN +603 2604 3909 [email protected]

STOCKS Price

Singapore Sembcorp Marine Yangzijiang Cosco Corporation Ezion Holdings PACC Offshore Pacific Radiance Nam Cheong Ltd Vard Holdings Ltd Mermaid Maritime Indonesia Wintermar Offshore Logindo Malaysia Coastal Contracts Deleum Bhd Pantech Group Sapura Kencana Bumi Armada Dialog Group Bhd Malaysia Marine & Heavy Eng Dayang Enterprise Holdings UMW Oil & Gas

Mkt Cap Target Price

Performance (%)

S$

US$m

S$

3 mth

12 mth

Rating

3.08 1.41 0.58 1.24 0.52 0.74 0.34 0.58 0.28

4,779 4,014 957 1,448 696 396 522 508 289

2.89 1.62 0.49 1.58 0.50 0.78 0.36 0.51 0.27

4.8 11.9 8.5 6.9 (1.0) 0.0 4.7 12.6 (5.2)

(24.7) 29.4 (19.6) (32.0) N.A (31.3) (5.6) (44.8) (45.5)

HOLD BUY FV BUY HOLD HOLD HOLD FV HOLD

510 2,140

160 107

730 2,460

(25.6) (2.5)

(41.0) (39.7)

HOLD HOLD

3.03 1.76 0.77 2.72 1.16 1.66 1.28

443 194 126 4,485 1,873 2,308 564

3.35 1.60 0.95 2.55 1.15 1.65 0.90

13.9 2.3 2.7 8.8 (3.3) 5.1 (3.8)

(38.8) (30.4) (23.5) (36.3) (52.5) (6.5) (66.5)

BUY HOLD BUY HOLD HOLD HOLD FV

2.57

620

2.85

(5.2)

(30.5)

HOLD

2.40

1,428

2.15

(7.7)

(38.0)

FV

Prices as of 17 April 2015 Source: DBS Bank, DBS Vickers, AllianceDBS

Regional Industry Focus Offshore & Marine

Analysts Janice CHUA

Suvro SARKAR

HO Pei Hwa

Arhnue TAN

+65 6682 3692 [email protected] +65 6682 3720 [email protected] +65 6682 3714 [email protected] +603 2604 3909 [email protected]

Table of Contents Investment Summary

3

Is it time to revisit O&G stocks?

4

Is there more downside to earnings?

7

Investment Themes #1: Survival of the fittest

8

#2: M&A plays Rigbuilders struggling at the deep end

14

Stock profiles

17

Oil Price Forecasts Base case scenario forecast for oil prices The demand supply game What has happened and what does history tell us? Critical issues that will affect the oil price scenario

28

What Does History Tell Us?

34

The Critical Issues Now

35

Conclusion

55

Appendices I - What is Regression?

58

II – Regression of Rigbuilders’ PE III - Scorecard Details IV – Qualitative Analysis

Page 2

11

Regional Industry Focus Offshore & Marine

INVESTMENT SUMMARY Structural issues make forecasting a more difficult affair this time around. We believe that over the last few years, global oil markets have been changing and becoming harder to forecast. We highlight some of these issues in more detail inside. 1. 2. 3. 4. 5. 6. 7. 8.

Response of OPEC – what to expect and why? How will the inventory buildup in the US and OECD countries affect prices? Is shale oil production in the US more resilient than we think? Structural changes in the global economy – less oil intensity and demand elasticity to oil prices? China – how much of an impact will it continue to have on global oil demand? The rally in the US dollar – further negative impact on oil prices? Geopolitical issues – any unplanned outages or supply resumptions on the horizon? Will global O&G capex reductions affect the long term picture?

Oil price volatility will prevail near term, though we can expect some rebound in the medium to long term. Unfavourable trends on both the supply and demand fronts in the near term, as well as the strong US$ will prevent oil prices from breaking out before 2H15. As storage capacities in OECD countries near peak levels, there could be high price volatility in the market from spillover fears, until we see production cuts. While we are tempted to call a market bottom for oil prices at US$45/bbl as seen in January 2015, we are not ruling out the odd wobble here and there over the course of the next few months. Base case forecast of US$55-65/bbl in 2015 and US$65-75/bbl in 2016. At this point, we are reasonably confident that oil prices will not tank and stay at lower levels for long, as we do not expect OPEC to maintain production levels for an indefinite time at prices below US$40-50/bbl. This would be asking too much from some of the weaker member nations. From 2H15 onwards, we expect some production cuts to kick in and support oil prices. But, in the absence of a strong demand push, the recovery in prices could be a tepid affair at best.

Thus, our base case forecast for oil prices for the rest of 2015 is US$55-65/bbl. For 2016, we project oil prices to recover to US$65-75/bbl. How quickly and how much can oil prices recover? On average, oil prices have empirically been slow to recover to pre-crisis levels, hovering at 50-80% of pre-crisis levels for the 12 months following an oil price bottom. The only outlier was the 1997-98 crisis, when a coordinated response by the OPEC producers to cut production had a strong impact on oil prices. Hence, it seems a recovery in demand does help to an extent but the supply side of the equation has a bigger bearing on oil price recovery following a steep slide. In the current scenario, the uncertainty regarding OPEC’s response does not bode well for a sharp oil price recovery. Time to bottom-fish oil and gas stocks? Value is emerging as the market is pricing in the negatives that is currently plaguing the sector. While we anticipate that negative industry-wide newsflow will continue to flow ranging from contract terminations, falling utilization and charter rates to earnings disappointments that would dampen sentiment further in next few months, investors may look to bargain hunt companies with strong fundamentals or M&A potential. Theme #1: Survival of the fittest. Against the backdrop of relatively weak oil prices in the next two years, uncompetitive O&G players may go bust. We devised a scorecard to determine the long term winners among smaller cap OSV providers, in conjunction with current valuation levels (details inside). Our top pick is Ezion (BUY; TP S$1.58). SapuraKencana (HOLD; RM2.55) would be the stock to watch for an upgrade in the event of crude oil price recovery given its upstream exposure. Avoid rigbuilders. Theme #2: M&As back in play. The plunge in oil prices is set to fuel a new wave of mergers and acquisitions in the 2H15, as majors shed fringe assets and smaller companies merge in an attempt to survive. We identified potential takeover targets to be Ezion, Ezra, Dyna-Mac and Triyard. SapuraKencana and Dayang are set on acquisition trails. Companies with high cash hoards such as Baker Tech are good privatisation candidates.

Page 3

Regional Industry Focus Offshore & Marine

IS IT TIME TO REVISIT O&G STOCKS? Downside risks are diminishing... Barring a complete collapse of the global economy, we believe downside catalysts for the oil and gas sector are fading. Most of the bad news is already out there: 1) Surging non-OPEC supply especially from the U.S.; 2) OPEC's refusal to cut production; 3) Slower-than-expected global economic growth (and hence energy demand); 4) Greater energy efficiency; 5) Strengthening USD; 6) Iran’s potential lifting of sanctions … and largely priced in. Investors are no longer viewing the sector with rose-coloured glasses, but are prepared for volatile and relatively low oil prices for the next 12-24 months. The new lower norm of oil prices has brought about capex and opex cuts by oil majors, translating to a plunge in rig count, and therefore terminations and renegotiations of rig charter contracts, thereon to declining charter rates and utilisation for both rigs and support vessels, and phasing out of less competitive players eventually. No doubt such news will continue to flow in the coming months, but we believe these are largely reflected in the stock prices. O&G stocks have lost 40-50% of their market cap. On average, market cap of oil & gas names have halved over the past 6 months. For Singapore companies, we note that stocks had lost almost 70% of their values during the GFC crisis. However, we do not think that stocks will test GFC levels this time around, given that operating conditions are better in terms of overall macro and oil demand outlook as well as access to funding as compared to the global recession during the GFC. Hence, it is also probably fair to look at relative stock price performances to the various indices instead of absolute price performance. On that front, underperformance of O&G names is greater this time round compared to during the GFC.

O&G stocks tumbled c.40-50% from Sept’14 to Mar’15; signs of price recovery since Mar’15 Share price performance

GFC

Sept'14 Mar'15

Mar'15 Current

STI EZRA Pacific Radiance VARD Ezion POSH Mermaid Cosco Corp Nam Cheong ASL Marine Sembcorp Marine Yangzijiang Average Relative performance to STI

-44% -83% na na -67% na -80% -78% -56% -64% -71% -63% -70% -26%

1% -63% -58% -58% -49% -49% -43% -34% -34% -29% -24% 5% -40% -41%

4% 19% 21% 43% 31% 12% 25% 22% 16% 0% 5% 11% 29% 24%

JCI Logindo Wintermar Average Relative performance to JCI

-46% na na na na

5% -57% -52% -54% -59%

4% 5% 6% 6% 2%

KLCI MMHE SapuraKencana Bumi Armada UMW O&G Coastal Contract Dayang Enterprise Deleum Pantech Group Dialog Group Average Relative performance to KLCI

-26% na na na na -53% -38% -41% -32% -50% -43% -17%

-3% -65% -47% -45% -45% -44% -35% -32% -29% -11% -39% -36%

2% 11% 19% 15% 11% 6% 13% 12% 4% 6% 10% 8%

Source: Bloomberg Finance L.P. Finance L.P, DBS Bank

Regression analysis supports our argument. We have run a linear regression to examine our hypothesis that O&G stocks should not test GFC levels despite similar oil price levels. We regress rigbuilders’ PEs to oil price and STI PE given that oil price is the key leading indicator of rigbuilding activities and STI’s valuation would reflect overall market and macro conditions. According to our analysis, Rigbuilders’ PE = -8.1492 + 0.052*Oil Price + 1.0968*STI PE Thus, at current oil price level, Singapore rigbuilders look fairly priced at c.10x PE. Please refer to Appendix I and II for more details on our regression analysis.

Page 4

Regional Industry Focus Offshore & Marine

Rigbuilders are trading close to 10x FY15F PE while SMC O&G names are trading at 5-10x PE after earnings downgrade post oil price collapse Name

Singapore SMM SCI Yangzijiang COSCO Ezion Ezra Mermaid Nam Cheong PACRA POSH Vard Average Malaysia Bumi Armada Coastal Contracts Dayang Dialog MMHE Perisai Sapura Kencana Average Indonesia Logindo Wintermar Average Europe Bourbon Farstad Prosafe SE Siem Solstad Offshore Average US Tidewater Hornbeck SEACOR Gulfmark Average

Crncy

Price

DBS

DBS

Mkt Cap

17 Apr

Target Price

Rec

SGD SGD SGD SGD SGD SGD SGD SGD

3.13 4.78 1.41 0.58 1.225 0.485 0.260 0.345

2.89 4.80 1.62 0.49 1.582 0.510 0.271 0.357

Hold Buy Buy FV Buy Hold Hold Hold

4843 6317 4003 962 1,433 364 272 536

SGD SGD SGD

0.740 0.515 0.600

0.780 0.500 0.505

Hold Hold FV

MYR

1.17

1.15

MYR

2.98

MYR MYR MYR MYR MYR

2.59 1.67 1.31 0.58 2.68

PE CY 16F

CY 15F

CY 16F

10.9 10.4 7.7 33.8 5.5 34.6 10.2 6.7

10.2 10.3 7.1 26.1 4.5 10.9 10.4 6.6

8.1 7.4 4.1 15.3 6.6 10.6 4.0 8.6

7.6 7.2 3.3 14.7 5.1 9.3 7.7 7.9

398 694 525

7.9 7.8 11.6 8.7

6.1 5.9 14.1 8.4

7.5 8.0 23.2 8.6

Hold

1,889

16.4

11.9

3.35

Buy

436

7.7

2.85 1.65 0.90 0.35 2.55

Hold Hold FV Sell Hold

625 2,323 577 190 4,421

(US$m)

CY 15F

EV/EBITDA

Net Debt to Ebitda CY 15F

EBITDA Margin

P/B

ROE

Net Pft CAGR 14-16

CY 16F

CY 15F

CY 156F

CY 15F

CY 15F

0.8 1.2 -1.3 9.2 2.9 7.5 0.4 2.7

0.9 1.1 -1.8 9.2 2.1 6.6 4.5 2.2

14.6 14.7 27.8 9.9 82.9 11.9 25.7 14.5

15.0 14.7 28.5 11.6 80.1 13.1 26.4 14.8

2.0 1.4 1.1 0.9 1.1 0.3 0.5 1.4

19.2 13.9 16.5 2.8 21.3 6.4 4.7 21.9

7.1 1.6 0.1 54.3 34.3 57.3 -28.2 -0.9

5.4 6.3 13.8 7.1

3.0 3.6 14.4

2.0 2.8 7.8

41.9 47.1 3.7

45.5 49.7 6.0

0.9 0.5 0.9 1.1

11.2 7.1 8.1 13.8

-2.6 48.4 -9.2

8.2

7.1

3.0

2.8

59.2

66.6

1.0

6.2

62.3

7.3

8.1

7.1

1.4

0.9

25.4

26.8

1.0

13.4

6.1

11.9 33.8 23.2 17.5 14.3

10.6 31.0 24.8 8.5 13.4

7.5 22.4 11.4 12.3 11.9

6.5 21.0 11.1 8.5 11.4

-0.5 0.8 -1.4 7.6 5.8

-0.8 1.1 -1.6 5.9 5.6

26.8 17.7 9.2 80.8 26.9

27.3 18.4 9.4 73.8 28.7

2.5 5.0 0.8 0.6 1.2

22.5 15.5 3.4 3.6 9.0

9.6 13.1 -19.3 120.5 -8.6

15.6

13.4

10.2

9.1

1.5

10.5

IDR IDR

2,040 484

2,460 730

Hold Hold

102 152

8.2 8.4 8.3

6.9 6.6 6.7

6.3 5.4 5.8

5.4 4.7 5.1

3.6 2.1

3.1 1.7

51.6 36.8

57.7 35.7

0.7 0.6 0.7

9.3 8.0 8.6

-13.5 3.1

EUR NOK NOK NOK NOK

18.23 38.00 26.50 2.69 49.50

NA NA NA NA NA

NR NR NR NR NR

1,234 192 789 131 247

23.9 12.4 3.6 na 3.7

20.4 na 4.3 na 4.8

6.1 na 4.8 6.1 7.6

6.8 8.1 4.5 7.6 8.9

3.0 7.1 3.4 7.2 6.6

2.8 7.9 4.2 8.4 7.9

26.4 32.2 54.6 34.6 39.8

25.5 30.0 50.5 33.4 38.6

0.9 0.2 0.9 0.2 0.3

3.9 1.1 24.7 1.7 8.1

-6.8 269.4 -4.1 na 23.9

10.9

9.9

6.1

7.2

0.5

7.9

8.1 19.6 27.7 533.7 147.3

15.2 18.4 21.9 na 18.5

15.8 6.1 6.4 4.9 8.3

7.8 6.8 7.2 8.9 7.7

0.6 0.6 0.9 0.4 0.6

6.0 2.5 na 0.6 3.0

USD USD USD USD

28.76 24.73 77.65 17.38

NA NA NA NA

NR NR NR NR

1,286 841 1,403 402

3.5 3.9 1.3 4.6

4.5 3.3 0.7 4.5

27.0 40.9 18.5 26.0

24.8 41.0 19.6 26.8

-22.1 -29.7 -8.5 na

Source: Companies, Bloomberg Finance L.P., DBS Bank

Page 5

Regional Industry Focus Offshore & Marine

Peak of negative newsflows = bottom of cycle. In fact, we are approaching the peak of negative newsflows, which often marks the bottom of the downturn and stock prices. While there may be little reason to rush in the rocking boat as 1H15 is widely

expected to remain highly volatile, it is time to put O&G stocks on the radar and bottom-fish when opportunities arise.

Oil price is the leading indicator of energy stock performance; Energy stocks tend to underperform for 12 months post oil price plunge in the demand-led case. Reason

Decline start date

Px before fall

Lowest price

% fall

Oil Price after 12M

% price rise

% of original

S&P 500 performance in next 12M

Energy index performance in next 12M

Energy index relative performance

1991

Reaction to 1991 Gulf War, reversal of oil price spike

16/01/91

30.20

16.50

-45%

17.60

7%

58%

10%

-6%

-16%

1992-94

OECD recessionary stretch

24/06/92

21.57

12.92

-40%

16.92

31%

78%

3%

1%

-2%

1996-98

Asian financial crisis, OPEC excess production

08/01/97

24.80

9.64

-61%

24.46

154%

99%

22%

14%

-7%

2001

Recession in EU and US

12/10/00

34.59

17.68

-49%

23.35

32%

68%

-20%

-7%

13%

2008

Global financial crisis

03/07/08

146.08

36.61

-75%

76.31

108%

52%

30%

20%

-9%

66%

71%

9%

4%

-4%

???

???

???

???

???

Average 2014-15

-54% Supply glut

19/06/14

115.06

46.59

-60%

???

Source: DBS, Bloomberg Finance L.P.

Prefer offshore service providers over rigbuilders. Singapore rigbuilders seem fairly valued at 1.5-2.0x PB and 10x PE in view of the rig supply glut, sector headwinds and Brazil saga. While rigbuilders' share prices have traditionally been highly correlated to oil prices, with a coefficient of 0.8-0.9x, sector structural issues may be a drag on fundamental catalysts – order wins in the next two years. The smaller O&G names are worse hit with their PEs having fallen to 5-10x on new revised forecasts and an average of 0.7x PB in anticipation of further earnings downside and asset deflation. Unlike the large cap rigbuilders which have relatively stronger balance sheets, O&G SMC is deemed more susceptible to insolvency risks, given the smaller cap and geared balance sheet. As such, we have devised a scorecard to identify the long-term winners who are likely to better weather the low oil price environment these two years.

Page 6

Regional Industry Focus Offshore & Marine

IS THERE MORE DOWNSIDE TO EARNINGS? Earnings forecasts have been downgraded. The market has fine-tuned its expectations and downgraded earnings for O&G stocks over the past six months. We have lowered our rigbuilders’ order win assumption from S$10bn to S$7bn; charter rates and utilisation for OSVs by 10-20% and 10-15% respectively.

OSVs: No further revision for now but wary of earnings disappointments. Earnings projects for OSV players are tricky due to the lack of market datapoints and short contract tenure. Our sense is that earnings would remain vulnerable to downward pressure in the next two quarters in the light of the low oil prices and continued falling rig count.

Slashed rigbuilders’ order win further. In line with the lower oil price forecast, we have trimmed our FY15 order win assumption for Singapore rigbuilders by a further S$2bn to S$5bn, but have kept our FY16 order win expectation of S$7bn intact. This is close to the post-GFC levels of S$2.9bn/S$6.2bn in 2009/2010. The impact to earnings would be more significant from 2H16 onwards. Hence, our FY16 PATMI forecasts for SMM are cut by 6.8%. Maintain HOLD.

Service rigs: Impute in 5% fall in charter rates. Ezion’s liftboat/service rig business has demonstrated resiliency over the past few months relative to OSVs. Nonetheless, it would not be logical for Ezion to be completely immune. We take the initiative to prudently lower charter rates, broad-brush, by 5% from 2H15 onwards. Accordingly, our EPS is cut by 4%/9%., while TP is reduced to S$1.55.

Revisions in assumptions Sub-sector Revision in assumptions since Oct-14

New changes

Downside risks

Singapore rigbuilders

We have lowered FY15 order win assumption from S$10bn to S$7bn in Dec-15.

Trimmed FY15 order wins further to S$5bn on the back of lower oil price expectations.

YTD order flow has been slow, making up only 5% of our assumption. We may have to revisit order win expectations by mid-2015.

Offshore support vessels

Trimmed charter rates by 10-20%

na

Downside risk prevails in the next two quarters in view of the falling rig count.

Service rigs

Reduced new contract assumption from 10 to 6.

Trimmed charter rates by 510%. This applies across the entire fleet, assuming renegotiation and re-contract at lower rates.

Less so on charter rates which we believe our assumptions are rather conservative but rescheduling of delivery due to yard delays.

Cut utilisation rates from 85% to 7075%

Source: Companies, DBS Bank

Revisions in earnings and TP; No changes to recommendations New PATMI FY15 FY16

% Chg FY15

FY16

TP S$

Sembcorp Marine

591.4

598.8

Unchanged

-6.8%

2.89 (unchanged)

Ezion

261.1

322.3

-4.2%

-8.5%

1.55 (Prev: 1.58)

Source: Companies, DBS Bank

Page 7

Regional Industry Focus Offshore & Marine

Theme #1: SURVIVAL OF THE FITTEST Scorecard The oil price collapse has taken a toll on oil and gas-related stocks, with share prices tumbling by an average of 40-50% since Sept’14. While the low oil price is affecting businesses across the supply chain, not everyone will be hit in the same manner and magnitude. The listed companies in Singapore, Malaysia and Indonesia are exposed to different parts of the value chain and have different business models – be it shipbuilding, owning vessels, or providing services. We propose a scorecard to better identify the long-term winners. Scorecard to identify long-term winners. Some O&M players will have relatively better financial strength, earnings visibility, and offer favourable risk/reward investment opportunities, for exposure to the sector over the cycles. How the scorecard works. Our final selection is based on a bottom-up approach, after examining the fundamentals of each company with respect to: 1) Business model, 2) Asset quality, 3) Earnings visibility, 4) Operational efficiency, and 5) Balance sheet strength. We grade the companies under our

coverage on 15 criteria under the broad headings above on a scale of 1 (lowest) to 4 (highest) based on defined thresholds. We then calculate the weighted average score (out of 4) with the average scores in each broad bucket weighted as follows: business model (20%), asset quality (15%), earnings visibility (15%), operating efficiencies (20%), balance sheet strength (25%). An additional 5% weight bonus is accorded for trading liquidity score. How the scores stack up. Ezion and Dayang are the clear leaders among the stocks under our coverage in the region, followed closely by Deleum and Dialog, mainly because of their niche positioning. SapuraKencana and Pantech also scored highly, given their exposure to protected markets. They are followed by Vard Holdings, Bumi Armada, UMWOG, Coastal Contracts, POSH, Pacific Radiance, Nam Cheong and Mermaid Maritime. Ranking low on our scale are Ezra Holdings and Vard. Please refer to Appendix III for more details on individual companies’ scores for each category and Appendix IV for qualitative analysis on each company

Scorecard (Highest score = 4) 4.00 3.50 3.00

3.34

3.30

3.13

3.08 2.69

2.69

2.50 2.00 1.50 1.00 0.50 -

Source: Companies, Bloomberg Finance L.P., DBS Bank

Page 8

2.65

2.56

2.50

2.49

2.46

2.40

2.40

2.23

2.21 1.98 1.74

Regional Industry Focus Offshore & Marine

Top picks – balancing scorecard against valuations Scores for Singapore stocks pegged against valuations 1.6

14

1.4

12

Vard

8

POSH

Ezion PB (x)

PE (x)

10

PACRA

Nam Cheong

6

Nam Cheong

1.2

Mermaid

Ezion

4

1.0

PACRA

Vard 0.8 0.6

Mermaid

POSH

0.4

2 1.50

Ezra 2.00

2.50 Scores (max = 4)

3.00

3.50

0.2 1.50

2.00

2.50 Scores (max = 4)

3.00

3.50

Source: Companies, Bloomberg Finance L.P., DBS Bank

Scores for Malaysia stocks pegged against valuations 2.5

18 UMW OG

2.1

16 Bumi Armada SapuraKencana

1.9 1.7

12

Dayang

1.5 1.3

10 Coastal

Deleum UMW OG SapuraKencana

1.1

Deleum

6 2.00

PB (x)

PE (x)

14

8

Dayang

2.3

0.9

Pantech

Coastal

Bumi Armada Pantech

0.7 2.50

3.00 Scores (max = 4)

Source: Companies, Bloomberg Finance L.P., DBS Bank

3.50

0.5 2.00

2.50

3.00

3.50

Scores (max = 4)

Page 9

Regional Industry Focus Offshore & Marine

Key financials Net gearing (x) FY14

Net debt/ EBITDA

FY14

FY15F

EBITDA Interest Cover FY14

Gross CCE (US$m) FY14

Short-term borrowings (US$m)

Current ratio

Cash conversion cycle

Operating margin

ROE

FY14

FY14 (x)

FY14 (Days)

FY15 (%)

FY15 (%)

Singapore Ezion Ezra Nam Cheong Pacific Radiance POSH Mermaid Maritime Vard Swissco Ausgroup Marco Polo Swiber Vallianz Otto Marine ASL Marine Triyard

0.86 1.39 0.42 0.53 0.45 0.04

3.8 10.3 1.6 3.9 7.5 0.4

2.9 8.8 1.9 3.6 3.9 0.6

12.8 2.6 20.5 6.4 5.5 13.6

332.9 241.0 216.2 101.4 12.2 89.4

303.9 696.6 150.3 51.8 260.5 8.9

1.55 1.12 2.10 1.74 0.61 3.66

(148) 105 281 46 (61) 66

47.7% 5.0% 13.5% 14.2% 25.9% 4.4%

17.4% 7.1% 21.9% 11.2% 7.1% 4.7%

1.76 0.82 0.40 0.77 1.50 2.17 2.05 0.48 0.48

17.6 75.04 N/A 5.11 N/A 9.49 14.05 6.21 1.99

13.4 N/A N/A N/A 16.92 NA N/A N/A N/A

21.7 -0.62 5.67 6.91 -1.20 2.27 1.75 2.35 6.84

250.3 29.2 51.2 13.8 166.3 20.8 3.4 51.5 34.7

1,008.6 54.4 3.1 60.7 349.4 118.7 163.7 215.6 117.4

1.11 0.69 2.35 0.64 1.59 0.88 1.08 1.26 1.32

284 (41) 141 130 234 37 87 250 198

2.3% N/A 0.03 0.17 N/A NA N/A N/A 0.13

8.1% 22.2% 3.8% 9.4% 0.5% NA N/A N/A 8.9%

Malaysia SapuraKencana^ Bumi Armada UMWOG Dialog MMHE Dayang Coastal Deleum Pantech

1.31 0.96 0.34 0.20 Net Cash 0.04 Net Cash 0.26 0.33

10.25 6.51 2.60 N/A nm 0.54 nm 0.68 1.30

9.20 7.04 2.00 1.07 nm nm 2.30 nm 0.90

7.70 11.00 16.00 26.40 16.90 37.50 N/A 27.22 9.68

349.1 593.8 327.5 193.7 163.7 25.9 130.5 21.0 22.4

305.2 391.7 345.6 79.1 73.6 30.0 26.5 14.1 45.0

1.28 1.91 1.13 1.84 1.35 1.55 3.20 1.51 2.36

39 156 108 17 43 86 552 66 215

31% 30% 31% 11% 6% 23% 22% 13% 15%

13% 6% 8% 16% 3% 25% 16% 21% 14%

38.0 30.7

1.23 0.62

15 48

20.1% 27.6%

8.0% 9.3%

^ Because SAKP has a Jan year end, we have used FY15A, FY16F and FY17F instead Indonesia Wintermar Logindo

0.65 0.91

2.0 3.0

2.2 3.6

Source: Companies, Bloomberg Finance L.P., DBS Bank

Page 10

6.0 6.2

29.8 6.0

Regional Industry Focus Offshore & Marine

Theme #2: MERGER & ACQUISITION PLAYS Shell kickstarts mega M&A. In a recent breaking news,, global O&G supermajor Shell swooped in to buy UK-based BG Group for Eur47bn (US$70bn) in the industry's first mega-deal since the oil price collapse. The deal will be funded by cash and new shares in Shell, and is expected to conclude by early 2016. This begs the question - who’s next? Could the Shell-BG deal spell the beginning of a new wave of mega-mergers in the sector? Exxon-Mobil is probably the only other supermajor that has the flexibility to do big-ticket deals, while BP could find itself the target of a takeover. Likewise, the M&A trend could gain traction in regional offshore marine space. The OSV sector, especially in the Asia Pacific region, is quite fragmented with a number of players offering similar services and vessel types. Hence, consolidation makes sense in order to gain better access to capital and move up the value chain. We expect the depressed valuations in the sector to lead to consolidation in the market, with companies having stronger balance sheets taking the opportunity to enhance their market shares while some players exit the market.

Sector's M&A and privatisation activities in the region have been heating up since 2014, as can be seen in the table below. The current spate of M&A activities, we noticed, is either triggered by substantial shareholders, mostly out of considerations to streamline ownership structures or to acquire related businesses to enhance long-term value for these shareholders. Strategic rationale aside, we believe feasible valuations and favourable financing costs have also played a role in facilitating deal flows. We have also seen private equity activity in the space, with buyouts of SGX-listed subsea services player Kreuz Holdings and ASX-listed OSV player Miclyn Express offshore. Press reports have also indicated in the past that some parties had expressed interest in Ezra’s deepwater subsea division, EMAS AMC, but that is in the past. With oil prices falling steeply, interest from PE funds could fluctuate but consolidation should continue. We believe FY15/16 could herald more M&A activities in this sector. Favourable interest rate environment for M&A activities. We see positive interest rate environment as one of the factors supporting buyouts. Interest rates in Singapore have remained relatively favourable and capable of supporting leveraged buyout deals.

Recent regional M&A activities in the offshore marine space Date

Target

Acquirer

Dec-14 Nov-14

CH Offshore Newcruz

Falcon Energy Vallianz

Oct-14

Strategic Marine Jaya Holdings (assets) Kreuz Holdings Ltd Neptune Marine Services Ltd Intan Offshore PPL Holdings Kreuz Subsea Aker Marine Contractors

Triyards Mermaid Marine Asia

Feb-14 Nov-13 Oct-12 Jan-11 Apr-10 Mar-10 Jan-10

Seller

Total Value (US$m)

Type

TV/ EBITDA

125 34

Cash Stock & Debt

20

Cash

Jaya Holdings

625

Cash

SEA9 Pte Ltd

Swiber Holdings Ltd

206

Cash

4.98

MTQ Corp Ltd Perisai Petroleum Yangzijiang SEA9

42 15 155 206

Ezra

Akastor ASA

250

Cash Stock Cash Cash Cash, Stock & Debt

8.13

Ezra Holdings Ltd Baker Technology Ltd Swiber

Swiber Holdings Henderson Marine Base Pty Ltd

8.01

Source: Bloomberg Finance L.P.

Page 11

Regional Industry Focus Offshore & Marine

Potential M&A candidates and deal rationale We attempt to identify potential M&A /privatisation candidates with specific criteria. We believe the M&A/privatisation and other corporate activities will continue in the low oil price environment amidst depressed valuations. Successful M&A deals could provide many benefits including possible expansion into related businesses, entry into new markets, acquisitions of new capabilities or just taking advantage of favourably priced targets to enhance positions in existing businesses, To pick out candidates that could potentially jump on the M&A/privatisation bandwagon, we think some of these criteria could be important: 1) High key investor shareholding with solvency issues; or 3) PE fund ownership; or 4) High cash, profitable, but illiquid counters; and/or 5) Senior founders/owners without apparent successors

Ezra Holdings – susceptible to corporate activity, asset sales/divestments in Group companies possible. Ezra Holdings, which comprises a 100% interest in its subsea business plus about 75% stake in recently listed OSV owner/operator EMAS Offshore plus about 67% stake in fabrication outfit Triyards Holdings, would be struggling to refinance its short-term borrowings in 2015, according to our estimates. The Group will need to refinance S$225m worth of notes by September 2015, as well as try to call back S$150m worth of perpetual securities, failing which the interest rate on the perpetual will rise by more than 300bps. Given that its balance sheet is already stretched and banks may be unwilling to refinance these liabilities on favourable terms, Ezra may need to consider a sale of assets as well as issue equity instruments to meet its requirements.

Scouting regionally among O&G-related names, we identify the potential takeover targets to be Ezion, Dyna-Mac and Ezra Group companies like Triyards and EMAS Offshore. Ezra Holdings itself could be subject to corporate restructuring in the near future, likely involving asset sales. Over in Malaysia, we believe SapuraKencana and Dayang are set on acquisition trails. We also identify companies with high cash hoards, such as Baker Tech, as good privatisation candidates.

Thus, we believe the Group’s listed but tightly held subsidiary companies, Triyards Holdings and EMAS Offshore (both NOT RATED) could be open to offers in the market. Triyards has a good track record in building OSVs, construction vessels as well as self-propelling units (SEUs or liftboats) and demand for the latter still remains robust. It is currently sitting on an orderbook of close to US$400m, and could be attractive opportunity for other yards in the region looking to access the liftboat building market. The Group’s OSV subsidiary EMAS Offshore is currently trading at distressed valuations of less than 0.3x P/BV and could also be an attractive takeover target for other OSV owners in the region looking to scale up.

Takeover targets: Ezion offers immediate access into new market segment. Ezion is a good takeover candidate in our view, as it has a first-mover advantage in Asia and a sizeable fleet of 37 service rigs. Valuation is compelling at 25%. Perdana’s net gearing is 0.9x and its ROE is 13%. For now though, timelines of the takeover are still uncertain. SapuraKencana pushing for more acreage. SapuraKencana is not resting on its laurels post the Newfield acquisition in 2014. The group has recently announced its intention to purchase new acreage in Vietnam as well as an unexplored onshore block in Sabah. The Vietnam acquisition will help to address declining output at Malaysian fields, keeping group production at 20-25k barrels a day in the next 2-3 years before new gas production comes on stream. The Sabah block could yield very significant results, and comes at a low cost of only USD40m, and blocks in Vietnam cost USD400m. Together, the purchases will leave group gearing of 1.2x largely unchanged but offer potential significant cash flow in the future, depending on exploration activity.

The shipyard consolidation theory: A case study on China's shipbuilding industry. During the shipping industry's superboom in 2007-2008, China had more than 3,000 big and small yards spread across the country. PostGFC, China's shipbuilding industry has undergone drastic consolidation as orders have dried out. Uncompetitive small yards were phased out while the bigger yards have been merged or acquired. Thus, there are now a little more than 100 shipyards with active day-to-day operations in China, a figure that has dwindled from about 400 during mid-2014. China will eventually be left with only 20 to 30 shipbuilding companies with active operations when the severe, ongoing consolidation period of the industry is completed over the next few years, according to Ren Yuanlin, Executive Chairman of Yangzijiang Shipbuilding. Rumours on the merger of the two largest private Chinese shipyards – Yangzijiang and Rongsheng. According to an upstream article in Mar'15, Yangzijiang is in advanced talks to take as much as a 20% stake in troubled HK-listed shipbuilder –

RongSheng. Earlier last year, the local government in Jiangsu was trying to rope in CSSC’s subsidiary - Shanghai Waigaoqiao Shipbuilding (SWS) to take over the Rongsheng yard but was unsuccessful. The latest development focuses on four investors, with Yangzijiang said to be set to take 20%, a number of Chinese banks including China Minsheng Bank, China Everbright Bank and China Development Bank to take up to 40%, major shareholders of China Rongsheng (including Zhang Zhirong) to hold 20%, and the rest to be held by other small investors. Yangzijiang has clarified that it is evaluating the opportunity and has yet to firm up its decision. If the offer price is attractive and the restructuring plan is clearly mapped out, it may not be a bad idea to consolidate and eliminate the potential threat that RongSheng poses, considering its strategic location within Yangzijiang’s close proximity. In addition, RongSheng has one of the largest and most advanced shipyards in China, which would allow Yangzijiang to expand its capacity in the construction of sophisticated vessels. Consolidation in Chinese rigbuilding space? In China, there are probably around 10 rigbuilders with orders on hand. Since Chinese yards started jumping on the offshore bandwagon in 2005, we observed that there are only a handful of pioneering yards, namely Dalian Shipbuilding, Cosco Corp, CIMC Raffles Yantai, Shanghai Waigaoqiao and China Merchant Industry Holdings, which have survived and retained focus on rigbuilding. Many smaller yards have kind of “tried-and-given-up”, realising that offshore projects were more complex than they initially thought, and making profits was almost impossible without economies of scale. Possible restructuring of Singapore shipyard groups? In the previous downcycle, Singapore shipyards went through a major consolidation during the late 1990s, where various mergers resulted in two giant Singapore government owned shipyard groups today. In 2001, the two Singapore shipyard groups embarked in preliminary talks to rationalise their shipyard operations but the deal fell through as they failed to agree on certain terms. This time round, Singapore shipyards are bracing for tough times ahead – absence of new rigbuilding orders, dwindling order book, low book to bill ratio, project cancellations, project deferments, high fixed cost and the need to keep shipyards at high utilization – will force the yards to look for ways to restructure. We do not rule out restructuring, mergers and acquisitions possibilities, as any cost rationalization exercises will boost competitiveness of Singapore yards, amidst rising competition from Korea and China, and the added burden of operating shipyards in Brazil .

Page 13

Regional Industry Focus Offshore & Marine

RIGBUILDERS STRUGGLING AT THE DEEP END Depressed oil price adds fuel to fire. Even if oil price rebounds to US$70/bbl, order win momentum is unlikely to see an immediate upswing, in view of the rig order backlog and keen competition, in our view. Lacklustre order momentum Oil price correlation may break. Singapore rigbuilders' stock prices traditionally have a strong correlation with oil prices, with a coefficient of 0.8-0.9x. This is because oil price is a leading indicator of order momentum, which is the key catalyst for rigbuilders’ stock performance. However, the correlation may break down this time round. Rigbuilders could lag oil price recovery, given that order flow might remain slow as the market needs time to digest the massive supply coming on stream where the bulk of the rigs are deployed. , Mobile rig deliveries, 1969 – 2018+

Huge order backlog... There are 209 drilling rigs under construction, largely to be delivered in 2015-2018, representing book-to-bill of 23%. In particular, orderbook-tofleet ratio is high for drillship at 50% due to a low base and long-term shift towards ultradeepwater and jackup at 23%, in anticipation of replacement demand as half of the fleet is >30 years' old. Meanwhile, semi-submersibles are more benign at 13% partly because of preference towards drillships. … but weaker demand outlook. Near-term demand for rigs took a turn for the worse since the oil price collapse as oil majors push back capex and rig count heads south. Global E&P spending is expected to fall around 17% this year with a greater cut in exploration activities

120

No. of delivers

100 80 60 40 20

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Jackup

Semisubmersibles

Drillships

Source: Clarkson, DBS Bank

US rig count fell c.50% to 988 as of 10 Apr, close to GFC trough 4500

Worldwide rigcount

4000

International rig count saw a mere 6% y-o-y decline as of Mar-2015 while US and Canada rig counts plunged 40-50% y-o-y

3500 3000 2500 2000 1500 1000 500 0 Jan-08 Jan-09 Source: Baker Hughes, DBS Bank Page 14

Jan-10

Jan-11

U.S.

Canada

Jan-12

Total Intl.

Jan-13

Jan-14

Jan-15

Regional Industry Focus Offshore & Marine

Downtrend in new orders since the big bang in 2012. There are zero rig orders YTD. New order trends for Singapore rigbuilders hit a peak of S$21bn, boosted by the Petrobras orders, and have been trending down since. This trend will be exacerbated by the current headwinds, led by the sizeable global rig orderbook and lower long-term oil prices.

New orders heading south

S $ bn 25

US $/bbl 120

Annual order wins

100

20

15 Lowering Singapore rigbuilders’ order win assumptions by 29% to S$5bn for 2015. We have trimmed our FY15 order win 10 assumption for Singapore rigbuilders by a further S$2bn to 12. 8 11.5 S$5bn, but keep our FY16 order win expectation of S$7bn intact. 5 10. 7 10. 4 6. 3 This is lower than the 10-year average of S$9bn secured by 4. 4 5. 1 2. 9 Singapore rigbuilders, and close to the post-GFC levels of 0 2003 2004 2005 2006 2007 2008 2009 2010 S$2.9bn/S$6.2bn in 2009/2010. Slower contract wins will lead to a declining orderbook in the next two years and affect earnings Singapore Rigbuilders' order wins (LHS) from 2H16 onwards. We expect new contracts to come from production platforms such as FPSOs, FLNG vessels, specialised Source: Companies, DBS Bank Estimates vessels (for instance, pipelay vessels, semi-submersible accommodation vessels and semi-submersible crane vessels).

80 60 21. 0 40

13.6

11. 1

9.2 5.0

7. 0

20 0

2011 2012 2013 2014 2015F2016F Oil price (RHS)

Orderbook of Singapore rigbuilders set on downtrend S$ m 30,000

Outstanding orderbook of Singapore Rigbuilders

Singapore rigbuilders Orderbook Orderbook – Petrobras* Orderbook - Other Rigbd & conversion* Revenue (Rigbdg + Conversion) Revenue – Petrobras* Revenue - Others Rigbg & conversion* Book to bill * Book to bill (Excl Petrobras)*

Boosted by S$14.2bn Petrobras orders in 2012

25,000 20,000 15,000 10,000 5,000

2015F

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0

Orderbook set to decline on the back of lower order intakes

S$ m 23,900 11,662 12,238 12,877 3,337 9,540 1.9x 1.3x

Ideal book-to-bill ratio would be 1.52.0x.

Source: Companies, *DBS Bank Estimates

Asset prices going downhill Softening utilisation rates and charter rates. The average utilisation for drilling rigs have declined to 90% a year ago. Semi-submersibles suffered the least, with only a 6-ppt drop and still hovers above 90%, probably due to lesser supply pressure. Meanwhile, drillships and jackups saw greater declines of 10ppt/14ppt to 80%/75%. The average charter rates can be misleading because of the additions of newer and more advanced rigs to the fleet. We observe that charter rates for jackups and drillships of similar specs have fallen around 20-30%. Asset prices to follow suit. While there hasn’t been newbuild orders for drilling rigs YTD, our channel checks suggest that the secondhand market for newbuild rigs under construction has

dropped some 10-15%. However, we believe there is more to go. Market players are monitoring for opportunities to bargain hunt assets on fire sale from shipyards that are desperate to recoup construction costs for owner-initiated cancellations or asset liquidations by creditors of rig-owners that go belly up. Petrobras scandal a can of worms… Petrobras corruption scandal is dragging the Brazilian O&G sector, deferring exploration and well development (thus delaying rig delivery and award of FPSO orders), resulting in funding issue of Sete Brasil, and closure of Brazilian O&G players. The Singapore rigbuilders were implicated as the agent/consultant appointed in Brazil were said to be involved in bribery, but both have refuted

Page 15

Regional Industry Focus Offshore & Marine

the allegations. The corruption investigations are ongoing in Brazil and may take awhile. This would create an overhang to Singapore rigbuilders, given that Petrobras-related projects account for almost half of their current order backlogs. So, what’s the impact? The rigbuilders were supposed to receive monthly milestone payments but these have been halted since Nov-2014 pending Sete Brasil’s project funding. We believe deliveries of the 13 rigs awarded to Singapore rigbuilders could be pushed back. In the worst case scenario, if Petrobras decides to cancel the rig contracts, then rigbuilders could suffer significant financial losses as those rigs fetch a price tag of over US$800m each which is 30-40% higher than the market now, adjusting for higher cost local content requirement. However, we believe this is unlikely to happen as Petrobras has already terminated the remaining 16 rig contracts with Brazilian yards, partly due to the yards’ incapability to deliver the rigs on time or meet their working capital requirements with delayed payments.

What could drive rigbuilding recovery? Catalyst #1: Retirement of old rigs. After a rigbuilding boom in 1980s, the sector went through a 20-year gloom till 2005 when we entered a new era of high oil prices. Hence, half of the rig fleet at current is >30 years' old and should gradually be retired. We believe the reality of lower oil prices will accelerate the replacement cycle. Rig owners are retiring older rigs and making plans to cold stack others in an effort to reduce costs in the current market climate. In general, most future rig attrition can be identified from the existing fleet of cold-stacked rigs, although in some instances a rig owner may opt to retire a rig immediately after contract completion. In the past few months, Hercules Offshore, Diamond Offshore, Noble Corporation and ENSCO have cold stacked a combined total of eight jackups and four semisubs. On the retirement front, since 4Q14, Transocean (11) and Diamond Offshore (6) have scrapped 17 floating rigs. Most recently, Noble Corp. (3) and Atwood Oceanics (1) announced the retirement of four floating rigs. All were older, shallow and mid-water units that were either

Page 16

not likely to work for some time or they were going to require substantial capital expenditures to remain competitive. The pace of old rig attribution plays a critical role in restoring supply/demand equilibrium as the recent rigbuilding boom in 2012-2014 was fuelled by replacement demand.

Catalyst #2: Cancellations at Chinese yards. Chinese yards benefitted most from the latest rigbuilding boom, raising their market share to a third of global orderbook of drilling rigs, from