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06 January 2015 Asia Pacific Equity Research Capital Goods (Capital Goods SG (Asia))

Asia Offshore and Marine Sector Research Analysts SECTOR REVIEW

Gerald Wong, CFA 65 6212 3037 [email protected] 2015 outlook: A watershed year Muzhafar Mukhtar, CFA 60 3 2723 2084 [email protected] Figure 1: Share price performance since 25 June 2014

Horace Tse 10% 7% 852 2101 7379 0% [email protected] -10%

Shih Haur Hwang -20% 16%

65 6212 3024 -30% -

20%

24%

25%

26%

- 26%

[email protected] -

27% -

-40% 28%

32%

34%

35%

36%

- 37%

-50% -

42%

45%

47% -

-60% 49%

51%

52%

53%

54%

56%

56% -

-70% -

64%

65% -

-80% - 75%

-90% -

Vard

COSL

POSH

DSME

MMHE

Swiber

COSCO

Triyards

UMWOG

Dyna-Mac

ASL ASL Marine

PT LogindoPT

Yangzijiang

Wah Seong

KeppelCorp

Icon Icon Offshore

BumiArmada

DialogGroup NamCheong

Ezra Holdings

Hyundai Mipo AlamMaritime

AbanOffshore

EzionHoldings

Sapurakencana

Hyundai Heavy

SamsungHeavy

Mermaid MarineMermaid

PacificRadiance

PerisaiPetroleum

MermaidMaritime

SembcorpMarine

Wintermar Offshore SembcorpIndustries

Change in share price Change in Brent price

Source: Company data, Credit Suisse estimates

■ Oil price dominates. Credit Suisse expects Brent to average US$75/bbl in 2015 and US$80/bbl in 2016, although persistent US drilling despite cost pressure could impact the timing and degree of recovery. While the full extent of capex cuts remains unclear, a decline in spending has already led to lower utilisation and dayrates for offshore equipment, contract cancellations and asset write-downs, which should continue into 2015. ■ Themes to watch in 2015. Beyond oil price, we would be watchful of the following key themes that could impact stock performance: (1) oversupply in selected segments and acceleration in attrition of old assets; (2) surge in Chinese jackup deliveries; (3) delivery of first drillship by a Singapore yard; (4) pickup in M&A activity; and (5) Sete Brasil's financial position. ■ Stay defensive for now. Given our bearish view on Brent in 1Q15, we maintain our defensive stance on the sector. Our preferred stocks fall into four baskets: (1) stocks trading close to trough (Vard), (2) stocks which may benefit from a pickup in M&A activity (Vard, Yantai Jereh), (3) stocks whose operations are relatively un-impacted by the decline in oil price (Dialog, Yangzijiang), and (4) quality names at attractive valuations (Keppel Corp, COSL and SapuraKencana). Our least preferred picks are Cosco Corp, Anton, and Icon Offshore.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

06 January 2015 Focus charts

Figure 2: Initial indications point to 8% YoY decline in Figure 3: Oversupply an issue with orderbook/fleet ratio capex, though full extent is too early to determine of most offshore assets at elevated levels

30.0% 70% 65% 20.0% 10.0% 60% 0.0% 50% -10.0% 46% -20.0% 40% -30.0% 33% -40.0% 28% 28% 29% 30% -50.0% 22% 19%

Total 20%

APAC NOCs

Russia 12% 12% EU E&Ps EU

US E&Ps US 10% CAN E&Ps CAN

Supermajors 10%

Other Majors / / Integs Majors Other 0%

Average (ex Aus/Brazil) (ex Average Drillship Semisub Jackups All rigs AHTS PSV All OSVs OSCV FPSO AccommodationLiftboat

2009/2008 2015/2014 Orderbook/fleet ratio

Source: Company data, Credit Suisse estimates Source: ODS-Petrodara, Clarksons, Credit Suisse

Figure 4: Chinese jackup deliveries to increase to 42 units Figure 5: Singapore yards could make further in 2015, though actual supply increase likely lower advancements in drillship market with delivery of first drillship by Sembcorp Marine 80 100% 90% 6 70 7 10 2 80% 60 70% 50 7 60% 14 42 2 9 12 40 5 50% 2 16 2 6 2 26 16 30 7 24 40% 2 4 4 30% 6 13 20 5 1 5 3 20% 3 4 28 23 6 23 3 2 10 10 6 18 1 11 13 13 3 14 5 10% 6 1 8 6 2 2 2 201 5 3 1 1 0 0% 1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Singapore China Korea Others Singapore China South Korea Brazil

Source: ODS-Petrodata Source: ODS-Petrodata

Figure 6: Stock selection theme and stocks in basket Theme/Stock Comments Stocks close to trough Vard Stock at P/B of 1.0x, below 2011 low of 1.4x. Net cash position Beneficiaries of M&A activity Vard Fincantieri has a 55.63% stake and could increase its holdings Yantai Jereh With a strong balance sheet, company aims to grow oilfield services segment by 70% CAGR in 2014-18. Limited impact from lower Brent Dialog 62% of intrinsic worth is in tank terminals, with 29% in other midstream/downstream Yangzijiang Shipbuilding Limited exposure to oil and gas. Gradual reduction in non-core investments Strong franchise at low valuation Keppel Corp Dividend yield of above 5% supported by diversified earnings stream COSL Beneficiary of CNOOC’s increased focus on deep water exploration in South China Sea SapuraKencana Dayrates for tender rigs remained resilient in 08/09 crisis Source: Credit Suisse

Asia Offshore and Marine Sector 2 06 January 2015 2015 outlook: A watershed year Tougher times ahead with fall in oil price Credit Suisse forecasts average Brent price of US$75/bbl and WTI of US$70/bbl in 2015. In our view, other producers will have to cut supply since OPEC will not cut. The likeliest candidate is onshore US production, as cash flow and capital spending will be sharply curtailed. Looking further out, Credit Suisse expects Brent prices to recover to US$80/bbl in 2016, and to US$85/bbl in the long term, as US$60/bbl oil prices are too low to fund the supply effort required. The key risks to the call, in our view, are persistent US drilling despite cost pressure, and the possible removal of Iranian sanctions mid-year. Based on Credit Suisse's analysis of global oil and gas capex trends across more than 150 listed companies as well as non-listed National Oil Companies (NOCs), total capex (excluding Brazil and Australia) is currently expected to fall by 8% YoY, versus a 12% decline in 2009. However, we believe these numbers may not have fully captured the extent of capex cuts as most plans will only be announced in early 2015. Into six months of the decline in oil price this cycle, we believe we are only starting to see the initial impact to the oilfield services sector coming through. In the midst of capex spending cuts by oil companies, we have started to see a combination of (1) lower utilisation and dayrates for offshore assets, including contract cancellations, (2) write-down of old assets, and (3) dividend suspension to preserve cash. Beyond oil price: Key themes in 2015 Beyond oil prices, we identify key industry themes which could impact the offshore and Surge in Chinese jackup marine sector and share price performance. This would include: (1) Oversupply in selected deliveries in 2015 segments. We expect new supply to exceed demand across most segments in 2015, leading to lower utilisation and dayrates for offshore assets and increased attrition. (2) Surge in Chinese jackup deliveries. There are 135 jackups scheduled to be delivered through 2017. Of the 72 jackups due for delivery in 2015, 42 are due for delivery from Chinese yards, a sharp increase from the 18 units delivered in 2014. We expect potentially more cancellations or delivery pushbacks as newbuild jackups struggle to be contracted upon delivery. (3) Delivery of first drillship by a Singapore yard. We believe the successful delivery of Sembcorp Marine's first drillship will boost its track record in the drillship market, which has been dominated by the Korean yards. (4) Pickup in M&A activity. As with previous downcycles, we believe this one poses potential M&A opportunities for companies in the sector. (5) Sete Brasil's financial strength. Sete Brasil is the Petrobras/Brazilian Government-backed entity created to spearhead the construction of 29 locally-built drilling rigs. We believe investor caution is deserved with press reports suggesting financing issues relating to the construction of those 29 rigs. Stay defensive for now Given our bearish view on Brent in 1Q15, we maintain our defensive stance on the sector. Given our bearish view on Our preferred stocks fall into four baskets: (1) stocks trading close to trough (Vard), (2) Brent in 1Q15, we maintain stocks which may benefit from a pickup in M&A activity (Vard, Yantai Jereh), and (3) stocks our defensive stance on the whose operations are relatively un-impacted by oil price decline (Dialog, Yangzijiang), (4) sector. quality names at compelling valuation (Keppel Corp, COSL and SapuraKencana). Our least preferred names are Cosco Corp, and Anton and Icon Offshore.

Asia Offshore and Marine Sector 3 06 January 2015 Valuation Figure 7: Offshore & Marine sector valuation comps Current Target Mkt Cap Ave 3M PE (x) PB (x) ROE (%) EV/EBITDA (x) Div Yield (%) Rating price price (US$m) T/O (mn) 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E 15E

Keppel Corp O 8.86 12.50 12,049 44.5 10.3 9.0 8.7 1.6 1.4 1.3 15.0 15.7 15.1 8.5 6.8 6.3 5.4 Sembcorp Marine N 3.29 3.60 5,144 11.4 12.3 11.2 9.9 2.3 2.1 1.9 18.8 18.6 18.9 6.1 5.3 4.5 4.6 Sembcorp Industries N 4.46 4.70 5,965 10.4 10.2 9.6 8.9 1.4 1.3 1.2 13.7 13.4 13.1 4.6 4.0 3.5 3.8 Singapore Rigbuilders 10.9 9.9 9.2 1.8 1.6 1.5 15.8 15.9 15.7 6.4 5.4 4.7 4.6

Vard Holdings O 0.61 0.80 539 2.9 13.2 7.2 7.2 1.0 0.9 0.8 7.8 12.7 11.6 7.7 4.7 3.9 4.0 Ezion Holdings U 1.15 1.50 1,353 16.7 6.0 4.7 4.2 1.2 1.0 0.8 17.5 20.6 18.7 7.9 5.3 4.5 0.1 ASL Marine NR 0.48 n.a 152 0.0 8.5 8.7 8.7 0.5 0.5 0.4 n.a 5.4 5.2 n.a n.a n.a 3.1 Dyna-Mac NR 0.33 n.a 249 0.3 11.2 9.0 8.1 1.6 1.5 1.4 15.0 16.6 17.9 6.1 4.9 3.9 6.2 Ezra Holdings NR 0.54 n.a 411 3.2 8.2 5.9 4.9 0.4 0.3 0.3 4.6 5.9 6.6 9.7 7.8 6.7 1.3 Mermaid Maritime NR 0.31 n.a 323 0.3 7.3 6.2 5.3 0.6 0.6 0.5 8.5 8.9 9.2 7.8 10.1 14.1 25.8 Nam Cheong NR 0.33 n.a 472 2.8 5.7 5.6 5.2 1.5 1.3 1.1 29.5 24.9 22.5 6.4 6.1 5.2 3.9 PACC Offshore Services NR 0.56 n.a 756 1.0 9.5 5.5 4.7 0.6 0.6 0.5 7.6 10.9 11.2 9.7 6.3 5.3 1.2 Pacific Radiance NR 0.82 n.a 443 2.5 6.1 5.3 4.6 1.1 0.9 0.7 18.9 18.0 17.5 7.9 6.4 5.5 7.8 Swiber Holdings NR 0.29 n.a 130 0.6 n.m n.m n.m. 0.3 0.3 0.3 0.6 n.m 0.2 13.4 21.3 23.0 0.0 Triyards NR 0.53 n.a 129 0.2 4.4 3.6 n.m. n.a n.a n.a 16.8 16.7 16.0 n.a n.a n.a n.a Singapore Mid-Cap 8.0 6.2 5.9 0.9 0.8 0.7 12.7 14.1 12.4 8.5 8.1 8.0 5.3

Cosco Corp U 0.57 0.60 955 0.6 31.9 22.8 16.5 0.9 0.9 0.9 2.9 4.0 5.3 14.8 12.7 10.5 1.8 Yangzijiang O 1.21 1.50 3,474 6.5 6.1 6.0 5.9 1.1 0.9 0.8 17.4 15.6 14.1 7.4 6.6 5.9 4.3 Guangzhou Shipyard - H NR 22.70 n.a 1,733 18.8 n.m 6.5 62.7 n.a n.a n.a n.m 33.5 2.9 n.a n.a n.a n.a Guangzhou Shipyard - A NR 35.62 n.a 2,511 66.4 n.a n.a 60.4 5.9 5.6 5.2 1.0 4.7 8.5 n.a n.a n.a n.a China CSSC NR 36.86 n.a 8,166 260.2 n.a 89.9 54.4 2.9 2.8 2.7 1.4 3.2 4.9 n.a n.a n.a 0.0 China Rongsheng NR 0.75 n.a 918 7.8 n.m n.m n.m 0.3 0.3 n.a n.m n.m n.a n.a 55.8 n.a 0.0 China Shipbuilding NR 9.21 n.a 27,186 546.0 45.1 38.5 36.8 3.1 2.9 2.8 6.3 7.4 7.2 34.8 28.4 24.6 0.5 Chinese Shipbuilders 27.7 32.8 39.5 2.4 2.3 2.5 5.8 11.4 7.2 19.0 25.9 13.7 1.3

Hyunday Heavy N 107,500 120,000 7,365 41.8 n.m n.m 39.4 0.5 0.5 0.5 n.m n.m 1.4 n.m 32.6 20.4 7.0 Samsung Heavy N 19,050 26,000 3,965 36.1 17.0 11.8 11.6 0.8 0.7 0.7 4.5 6.1 6.0 11.7 8.0 7.6 2.6 Hyundai MIPO U 68,900 68,400 1,242 19.5 n.m n.m 36.9 0.6 0.6 0.6 n.m n.m 1.6 n.m n.m 58.6 2.9 Korea Shipbuilders 15.8 10.3 23.6 0.6 0.6 0.6 4.5 6.8 4.6 8.2 14.9 22.6 3.1

IHI Corp O 617.0 600.00 7,916 55.2 24.2 19.9 16.5 2.6 2.3 2.1 10.6 11.7 12.6 10.1 8.8 8.0 1.2 Kawasaki HI NR 553.0 n.a 7,668 77.1 19.5 15.6 13.4 2.3 2.1 1.9 12.7 14.9 15.2 7.5 6.2 5.6 1.7 Mitsubishi HI O 670 800.00 18,642 96.1 15.9 14.7 12.9 1.4 1.3 1.2 8.7 8.8 9.3 6.8 6.1 5.5 1.7 Japan Shipbuilders 19.9 16.7 14.3 2.1 1.9 1.7 10.7 11.8 12.4 8.1 7.0 6.4 1.5

COSL O 13.80 17.50 13,107 42.0 6.9 7.4 6.8 1.2 1.1 0.9 16.9 14.3 13.8 7.9 7.9 6.9 4.1 Aban Offshore O 511.30 900.00 459 3.2 5.4 4.9 5.1 0.5 0.5 0.4 9.5 9.9 8.8 6.5 5.7 5.4 1.1 Mermaid Marine N 1.26 2.40 373 2.1 5.8 5.7 5.7 0.6 0.6 0.5 9.3 9.9 9.3 4.7 3.9 3.6 8.7 Asia Offshore Services 6.0 6.0 5.9 0.8 0.7 0.6 11.9 11.3 10.6 6.4 5.8 5.3 4.6

Bumi Armada N 1.13 1.10 1,873 5.9 14.4 15.0 9.2 1.0 1.0 0.9 6.1 6.7 10.0 9.1 11.5 12.1 0.2 MMHE U 1.75 3.25 791 1.0 10.8 10.1 10.9 1.0 0.9 0.9 9.4 9.4 8.2 6.6 6.3 7.1 2.9 UMW Oil & Gas NR 2.39 n.a 1,460 4.2 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a Alam Maritim NR 0.66 n.a 171 1.5 8.2 7.6 6.9 0.8 0.7 0.6 10.7 10.0 12.6 9.7 10.2 9.7 5.0 Dialog Group O 1.52 1.90 2,129 6.5 32.7 27.6 23.6 4.6 4.2 3.8 15.4 16.9 18.2 26.2 22.5 20.3 1.4 Perisai Petroleum NR 0.47 n.a 158 2.9 31.3 5.4 3.2 0.8 0.7 0.6 2.8 10.5 15.3 17.2 9.5 7.2 0.0 SapuraKencana O 2.35 4.10 3,978 20.0 10.2 9.4 8.5 1.3 1.1 1.0 13.4 13.5 13.5 9.2 8.5 7.8 1.2 Wah Seong NR 1.23 n.a 269 0.4 8.4 7.7 7.1 0.9 0.8 0.9 10.5 10.8 18.6 5.4 5.0 4.6 5.4 Malaysia Oil and Gas 16.6 11.8 9.9 1.5 1.3 1.2 9.8 11.1 13.8 11.9 10.5 9.8 2.3

Atwood Oceanics N 28.67 40.00 1,845 13.7 5.4 4.5 n.a 0.7 0.6 n.a 13.1 13.9 n.a 6.0 5.2 n.a 2.9 Diamond Offshore N 37.23 35.00 5,106 17.9 12.2 13.1 19.5 1.2 1.2 1.2 9.5 9.0 6.3 6.4 6.0 6.8 9.4 Ensco N 30.17 30.00 7,068 46.0 5.2 6.1 7.3 0.6 0.6 0.5 11.3 9.2 7.5 5.0 5.8 6.3 9.9 Hercules N 1.03 1.00 166 1.5 n.m n.m n.m 0.2 0.3 0.3 n.m n.m n.m 5.0 36.6 13.5 0.0 Noble O 16.84 30.00 4,243 36.0 5.5 8.5 10.1 0.6 0.6 0.6 10.5 6.8 5.7 4.4 5.3 5.5 8.9 Ocean Rig R 9.42 n.a 1,241 2.2 5.2 5.4 n.a 0.4 0.4 n.a 7.5 6.8 n.a 5.1 4.5 n.a 8.1 Rowan O 23.72 32.00 2,954 11.8 11.0 7.9 7.2 0.6 0.5 0.5 5.2 6.8 6.9 7.8 5.9 5.1 1.7 Seadrill N 12.01 15.00 5,620 36.6 4.6 4.5 4.3 0.6 0.5 0.4 13.4 13.4 12.7 7.3 6.2 4.8 0.0 Transocean N 18.12 15.00 6,564 56.0 3.8 7.4 11.9 0.4 0.4 0.4 7.8 5.8 3.2 3.7 5.4 6.7 9.8 US Offshore Services 6.6 7.2 10.1 0.6 0.6 0.6 9.8 9.0 7.1 5.6 9.0 7.0 5.6

Aker Solutions N 21.00 22.00 754 4.4 n.m 36.8 17.7 0.5 0.5 0.5 n.m 1.4 2.8 6.8 6.8 5.6 0.0 Saipem U 8.78 10.00 4,627 94.8 13.8 8.4 6.1 0.8 0.8 0.7 6.0 9.1 11.5 6.8 5.4 4.4 4.0 Subsea 7 N 77.25 100.00 3,363 24.8 4.8 6.9 7.6 0.5 0.5 0.4 11.2 7.2 6.3 2.7 3.5 3.4 5.9 Technip N 49.3 60.0 6701.24 62.0 11.2 8.9 8.1 1.4 1.3 1.2 12.5 14.8 14.6 4.5 3.5 2.9 3.8 Gulf Marine Services NR 102.00 n.a 545 0.3 7.4 5.3 3.9 1.6 1.2 0.9 29.3 25.7 27.3 7.0 5.6 4.0 1.8 European Offshore Services 10.0 15.2 9.9 0.8 0.8 0.7 9.9 8.1 8.8 5.2 4.8 4.1 3.4

Wintermar NR 785.00 n.a 250 0.3 8.1 7.2 6.4 1.2 1.1 0.9 12.9 14.2 14.6 3.6 3.2 2.9 1.3 PT Logindo NR 2,790.00 n.a 142 0.1 6.6 5.8 4.5 1.1 1.0 n.a 18.4 17.7 18.3 0.0 0.0 n.a 2.6 Indonesia Oil and Gas 7.4 6.5 5.4 1.2 1.0 0.9 15.7 15.9 16.4 1.8 1.6 2.9 1.9 Source: Thomson-Reuters, Company data, Credit Suisse estimates

Asia Offshore and Marine Sector 4 06 January 2015 Tougher times ahead with fall in oil price Brent bear case becomes our central price forecast Credit Suisse forecasts average Brent price of US$75/bbl and WTI of US$70/bbl in 2015. In our view, other producers will have to cut supply since OPEC will not cut. The likeliest candidate is onshore US production, as cash flow and capital spending will be sharply curtailed at US$70/bbl WTI.

Figure 8: Credit Suisse oil price forecasts In US$/bbl FY12A FY13A FY14E 1Q15 2Q15 3Q15 4Q15 FY15E FY16E FY17E Long-term Brent Actuals & CS Forecast 111.68 108.70 100.81 68.00 75.00 78.00 80.00 75.25 80.00 80.00 85.00 Futures Curves 72.96 73.96 75.53 76.77 77.88 76.04 80.50 83.62 WTI Actuals & CS Forecast 94.15 98.08 94.22 62.00 70.00 73.00 75.00 70.00 75.00 75.00 80.00 Futures Curves 69.17 69.41 69.88 70.23 70.81 70.08 72.48 75.14 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Fundamentally things will likely get worse first, but demand/supply imbalance looks nothing like the 1980s On their current trajectory, global supply and demand are on track to drive OECD stocks to levels last seen in the 08/09 crisis. In terms of demand cover, these stocks should rise to more than 60-days by end of 1Q15.

Figure 9: A building inventory surplus best illustrates the Figure 10: A look back at prior episodes of oversupply current s/d imbalance

Source: IEA, Joint Oil Data Initiative, National Statistical Agencies, BP Source: BP Statistical Review, Credit Suisse Research Statistical Review of World Energy 2014, Credit Suisse Research While the near-term inventory overhang is real, global supply and demand requires much more modest adjustment as a percentage of demand than was the case historically. In the past 20 years, there were three prior episodes where the structure of the front end of the futures curves shows a deep contango—in 1998, 2005 and 2008. As opposed to the Asian Financial Crisis of the late 1990s or the Global Financial Crisis of 2008, demand is still growing. In 1998, the Asian Financial Crisis had undermined oil demand, which was compounded by Saudi Arabia engaging Venezuela in a fray for US market share.

Asia Offshore and Marine Sector 5 06 January 2015

Figure 11: Collapses in Brent structure in the last 20 years Figure 12: The 2014 collapse seems to track that of 1997

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Risks to recovery thesis Credit Suisse expects Brent prices to recover to US$80/bbl in 2016, and to US$85/bbl in the long term, as US$60/bbl oil prices are too low to fund the supply effort required. After a period of sharp oil price decline in which capital discipline becomes of paramount importance, companies may be forced to cut back on operations. As more than half of the world's oil is produced from fields that are in decline, operational spending cuts will accelerate decline rates. The global decline on the 92 mbd production base is around 4mbd. In Figure 13, we show the vulnerability of production in various countries to sharper declines based on the aggregate capacity of fields that are in decline. In Figure 14, we show the change in production from peak to trough during the global financial crisis.

Figure 13: Declining production by country in 2015 Figure 14: Peak to trough production deltas during the global financial crisis

Source: Woodmac, Credit Suisse estimates Source: Credit Suisse The key risks to the call, in our view, are persistent US drilling despite cost pressure, and the possible removal of Iranian sanctions mid-year. We assume the price cut removes 500,000 b/d from US growth in 2015. However, much hinges on the behaviour of hundreds of individual, profit driven entities, and this behavioural aspect clouds the outlook. Too early to determine extent of capex spending cuts Based on Credit Suisse's analysis of global oil and gas capex trends across more than 150 listed companies as well as non-listed National Oil Companies (NOCs), total capex (excluding Brazil and Australia) is currently expected to fall by 8% YoY, versus a 12% decline in 2009. In 2009, there were still pockets of spending that were increasing dramatically, including North America shale, oil sands, Australia LNG, Brazil presalt and Pemex. However, there are less of such tailwinds going into 2015 and 2016.

Asia Offshore and Marine Sector 6 06 January 2015

While these numbers may not have fully captured the extent of capex cuts as most plans will only be announced in early 2015, announcements from ConocoPhilips and Petronas might provide an indication of what may come.

Figure 15: Capex spending YoY change—2015 versus 2009

30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%

-50.0%

Total

APAC NOCs

Russia

US E&Ps US E&Ps EU

CAN E&Ps CAN

Supermajors

Other Majors / / Integs Majors Other Average (ex Aus/Brazil) (ex Average

2009/2008 2015/2014

Source: Company data, Credit Suisse estimates ConocoPhilips capex budget down 20% YoY E&P capex could decline ConocoPhilips is the first major to release a detailed capex budget for 2015. The $13.5bn 1% YoY in 2014, before budget is down 20% YoY and likely at the low end of the consensus. The reduction increasing slightly in 2015 reflects two key themes, including a natural rebalancing of ConocoPhilips towards a company that more sustainably covers capex and dividend at lower oil prices over time, as well as a large reduction in North America development drilling.

Figure 16: ConocoPhillips capex (old versus new)

18,000 0.0%

16,000 -2.0%

14,000 -4.0%

12,000 -6.0%

10,000 -8.0%

8,000 -10.0%

6,000 -12.0%

4,000 -14.0%

2,000 -16.0%

- -18.0% 2014 2015 2016 2017 2018

Old (LHS) New (LHS) % change (RHS)

Source: Company data, Credit Suisse estimates Petronas indicated 2015 capex could be cut by 15-20% Petronas reiterated in even clearer terms the worsening outlook for O&G service contractors. In its 3Q briefing, CEO Tan Sri Shamsul Abbas indicated that 2015 capex could be cut by 15-20%. New RSCs for marginal fields would also be no longer feasible unless Brent settles above US$80/bbl, while under the assumption of US$75/bbl,

Asia Offshore and Marine Sector 7 06 January 2015

Petronas' contributions to the government in 2015 would be reduced by 37%, if it were allowed to maintain its fiscal discipline. We had also been hearing about the resilience of Malaysian service companies in the recent round of quarterly results, arising from the assumption that Petronas will keep spending no matter how low oil prices go, to keep production up. This bubble of wishful thinking was adequately pricked by the Petronas CEO in the briefing: 'Taking a jibe at the forecasters, Shamsul says he has been warning of a shake-up in the industry in all his quarterly briefings. “But nobody wants to listen to me. The worst part is, some of them have been listening to these so-called desk-top analysts who say this cannot happen because Petronas is always there to help them out … dream on.” - "Petronas cuts capex", The Star, 29 November 2014. Shallow water not immune to spending cuts In our discussion with investors, a common question we come across is whether there are bright spots in the current uncertain environment which might relatively be un-impacted by capex cuts. In particular, shallow water spending has been suggested as an area which might be 'recession-proof'. In Figure 17 and Figure 18, we show the breakdown of shallow water versus deepwater spending globally and in Asia Pacific from 2007-10, respectively. While global deepwater E&P expenditure declined by 10.0% in 2008, this followed strong growth of 12.7% in 2008. On the other hand, global shallow water E&P expenditure fell by 7.1% in 2009, following a 1.2% decline in 2008. In Asia Pacific, deepwater E&P expenditure fell by 9.2% in 2009 following an 18.3% increase in 2008, while shallow water E&P expenditure fell by 6.7% in 2009 after a 4.8% rise in 2008.

Figure 17: Global shallow water versus deepwater Figure 18: Asia Pacific shallow water versus deepwater expenditure expenditure 140,000 25.0% 40,000 25.0% 135,000 20.0% 35,000 20.0% 15.0% 130,000 15.0% 30,000 10.0% 125,000 10.0% 25,000 5.0% 120,000 5.0% 20,000 0.0% 115,000 0.0% 15,000 -5.0% 110,000 -5.0% 10,000 -10.0%

105,000 -10.0% 5,000 -15.0%

100,000 -15.0% - -20.0% 2007 2008 2009 2010 2007 2008 2009 2010

Shallow water E&P Expenditure (US$mn) Deepwater E&P Expenditure (US$mn) Shallow water E&P Expenditure (US$mn) Deepwater E&P Expenditure (US$mn) Shallow water E&P Expenditure (YoY%) Deepwater E&P Expenditure (YoY %) Shallow water E&P Expenditure (YoY%) Deepwater E&P Expenditure (YoY %) Source: ODS-Petrodata Source: ODS-Petrodata Impact to offshore services only starting to come through Into six months of the decline in oil price this cycle, we believe we are only starting to see the initial impact to the oilfield services sector coming through. As seen from the 2008-09 cycle, contract cancellations with rigbuilders continued more than five quarters into the oil price shock, with Keppel's termination of GSP Titan in May 2009 and Sembcorp Marine's termination of PetroRig 1 in April 2009 and Petropod in September 2009. However, their share prices have recovered before then with the recovery in global economic indicators.

Asia Offshore and Marine Sector 8 06 January 2015

Figure 19: Keppel's share price performance versus oil price (change to oil price versus events—include SMM cancellations)

(US$) Oil Price (S$) Dec'08: KEP - Nov'14: Seadrill Nov'08: Seadrill, Termination of MPU suspends dividend Heavy Lifter Project payment 160.0 Scorpion and Lewek reviewing Jan'09: Seadrill continues options - share with jackup project Nov'14: Transocean price falls 12.5% takes US$2.8 bn writedown 140.0 Apr'09: SMM - Termination of Petrorig semisub contract

May'09: KEP - 120.0 Termination of GSP Titan's Vessel

Cancellation risks Sep'09: SMM - Cancellation of jackup 100.0 contract with Petropod

80.0

60.0

Order recovery 40.0

20.0 Dec'09: Another 3 contract wins worth more than US$300mn 0.0 Jan-07 May- Oct-07 Feb-08 Jul-08 Nov-08 Apr-09 Aug-09 Jan-10 Jun-10 Oct-10 Mar-11 Jul-11 Dec-11 Apr-12 Sep-12 Jan-13 Jun-13 Oct-13 Mar-14 Aug-14 07

Aug'08: Last major order - US$560 mn Nov'09: Noble drillship Oct'14: BOT Lease jackup semisub rig from ENSCO contract worth US$304mn contract worth US$240mn

Oil Price

Source: Company data, Credit Suisse, the BLOOMBERG PROFESSIONAL™ service In Figure 20, we summarise the key industry newsflow since September 2014. In the midst of capex spending cuts by oil companies, we have started to see a combination of: (1) lower utilisation and dayrates for offshore assets, including contract cancellations, (2) write-down of old assets, and (3) dividend suspension to preserve cash.

Asia Offshore and Marine Sector 9 06 January 2015

Figure 20: Oil and gas spending related newsflow since September 2014 Date News 17-Sep-14 Statoil has decided to suspend its charter for semi-submersible COSL Pioneer for three months due to “rig overcapacity” 31-Oct-14 ExxonMobil sticks to capex budget of ~US$37 bn for 2015-2017 07-Nov-14 Transocean expects to record an impairment of $788 mn on its deep-water rig assets and $1.97 bn related to impairment of goodwill “due to the decline in the market valuation of the contract drilling business”. 12-Nov-14 Tullow Oil placed African projects under review and to cut exploration spending over next two years 13-Nov-14 Gazprom says it will spend 839 bn rouble in 2015, versus 1 tn rouble in 2014 17-Nov-14 Energy Minister expects a sharp drop in investments by Norway's oil industry. 19-Nov-14 Oman will maintain capex program for 2015, says Ministry of Oil & Gas 20-Nov-14 Shell and Petronas took FID to develop E6 gas field offshore Sarawak 26-Nov-14 Seadrill announces it is suspending dividend distributions and focusing on debt reduction and value-creating opportunities due to significant deterioration in the broader markets 28-Nov-14 Petronas could cut capex by 15-20% in 2015, according to CEO 05-Dec-14 Statoil extend the period of suspension it had imposed on a trio of rig charters due to overcapacity in the rig market 05-Dec-14 US shale giant Continental Resources will cut its 2015 capital spending budget by $600 mn to $4.6 bn as the company postpones a planned expansion of drilling due to falling oil prices 07-Dec-14 ASL Marine has reached an agreement with a customer to cancel shipbuilding contracts for two OSVs. Unless the OSVs are resold, the revenues booked to date will “have to be reversed.” 08-Dec-14 Mermaid Maritime is currently marketing its MTR-2 drilling rig after its major international client terminated its contract as client is unable to obtain permits to continue working 08-Dec-14 ConocoPhillips has slashed its capital expenditure, aiming for capex of $13.5 bn next year, down 20% on this year 09-Dec-14 Canadian producer Baytex Energy will cut its capital spending plans by 30% in 2015 11-Dec-14 Santos has announced its plans to cut expenditure from a previous guidance of $2.7 bn to $2 bn. Growth and sustaining capital expenditure are now expected to be $1.4 bn and $600 mn, respectively. 16-Dec-14 Ecopetrol will slash its 2015 capital spend by more than 30% to $7.86 bn under pressure from falling oil prices and production hits from guerilla attacks. 16-Dec-14 Paragon Offshore will see three Mexico rigs roll off contract for Pemex by the end of the year as the scope of some work for the state-led oil company has been reduced. 17-Dec-14 Rosetta Resources unveiled a "flexible" capital expenditure plan for 2015 that could see the US independent spend anywhere between $700 mn and $900 mn. 18-Dec-14 US independent Marathon Oil is slashing its 2015 capital expenditure budget by 20% year-on-year, between $4.3 bn and $4.5 bn next year Source: Upstream, Company data, Credit Suisse

Asia Offshore and Marine Sector 10 06 January 2015 Beyond oil price: Key themes in 2015 Beyond oil prices, we identify key industry themes which could impact the offshore and marine sector and share price performance. This would include: (1) Oversupply in selected offshore segments (2) Chinese rig deliveries accelerate (3) Singapore yard delivers first drillship unit (4) Pickup in M&A activity (5) Watch Sete Brasil Theme #1 – Oversupply in selected segments could lead to accelerated removal of old assets We expect new supply to exceed demand across most segments in 2015, leading to lower utilisation and dayrates for offshore assets. As shown in Figure 21, the orderbook/fleet ratio of most offshore equipment stands above 20%, with the exception of semisubs, AHTS and liftboats. Assuming that all equipment gets delivered over the next 36 months, this would imply more than 5% growth per annum, which might be challenging to absorb in a declining capex environment.

Figure 21: Orderbook/fleet ratio across offshore segments

70% 65%

60%

50% 46%

40% 33% 28% 28% 29% 30% 22% 19% 20% 12% 12% 10% 10%

0% Drillship Semisub Jackups All rigs AHTS PSV All OSVs OSCV FPSO AccommodationLiftboat

Orderbook/fleet ratio

Source: ODS-Petrodata, Clarksons, Credit Suisse We highlight this oversupply using examples from the drillship and accommodation semisub sub-segments. There are 22 drillships scheduled for delivery in 2015, representing a fleet growth of 15% excluding removal. This is higher than the 21 drillships that were delivered in 2014, as a number of deliveries were pushed back to 2015. Likewise, the number of accommodation semisubs is expected to increase by five units to 30 units in 2015, representing a fleet growth of 20%. This follows an increase in five units in 2014.

Asia Offshore and Marine Sector 11 06 January 2015

Figure 22: Drillship annual deliveries Figure 23: Accommodation Semisub fleet

25 35 32 22 30 21 30 25 20 25 17 20 20 16 16 17 17 17 17 17 17 15 14 12 15 11 10 10 10 9 7 7 5

5 0 3 3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E 1 1 0 Prosafe Consafe Floatel Int. Cotemar 0 2005200620072008200920102011201220132014 2015201620172018 2019 Pemex COSL FOE ETESCO Axis Offshore OOS Jasper POSH Drillship delivery

Source: ODS-Petrodata Source: Prosafe Expect more attrition of old assets With a surge in newbuild deliveries, we expect the rig replacement cycle to drive downward pressure on dayrates and utilisation rates of older assets. As a result, companies with premium assets are likely to outperform companies with standard/ commodity fleets. We have started to see some of the major drillers write down assets and stack rigs, including Diamond Offshore, Ensco and Transocean, and would expect this to accelerate in 2015. According to ODS-Petrodata, there were eight jackups and eight semisubs that were cold stacked in 2014.

Figure 24: Cold stacked rigs in 2014 Rig name Rig type Cold stacked date Manager ENSCO DS-2 Drillship 27-Nov-2014 Ensco Hercules 203 Jackup 22-Jan-2014 Hercules Offshore Hercules 212 Jackup 19-Jun-2014 Hercules Offshore Jupiter One Jackup 1-Jul-2014 Focus Energy Hercules 204 Jackup 11-Jul-2014 Hercules Offshore ENSCO 90 Jackup 3-Aug-2014 Ensco Nabors 240 Jackup 14-Sep-2014 Nabors Hercules 202 Jackup 6-Oct-2014 Hercules Offshore Hercules 213 Jackup 3-Nov-2014 Hercules Offshore ENSCO 5000 Semisubmersible 1-Jan-2014 Ensco ENSCO 5002 Semisubmersible 15-May-2014 Ensco ENSCO 6000 Semisubmersible 3-Jun-2014 Ensco Ocean Vanguard Semisubmersible 17-Jun-2014 Diamond Offshore Ocean Saratoga Semisubmersible 21-Jun-2014 Diamond Offshore Borgny Dolphin Semisubmersible 31-Aug-2014 Dolphin Noble Homer Ferrington Semisubmersible 13-Oct-2014 Noble Ocean General Semisubmersible 23-Oct-2014 Diamond Offshore Source: ODS-Petrodata According to ODS-Petrodata, there were four jackups removed in 2014, all converted to non-drilling purposes. In addition, there were 14 semisubs that were either retired or scrapped.

Asia Offshore and Marine Sector 12 06 January 2015

Figure 25: Rig Attrition in 2014 Rig name Rig type Attrition date Manager Attrition Reason Strategic Excellence Jackup 1-Apr-2014 Union International Energy Conversion to non-drilling Hercules 250 Jackup 10-Jun-2014 Hercules Offshore Conversion to non-drilling Ocean Spartan Jackup 25-Jul-2014 Diamond Offshore Conversion to non-drilling Petrobaltic Jackup 30-Oct-2014 LOTOS Petrobaltic Conversion to non-drilling Ocean Epoch Semisubmersible 23-Oct-2014 Diamond Offshore Retirement Ocean New Era Semisubmersible 23-Oct-2014 Diamond Offshore Retirement Ocean Whittington Semisubmersible 23-Oct-2014 Diamond Offshore Retirement Atwood Southern Cross Semisubmersible 1-Dec-2014 Atwood Scrapped Sedco 709 Semisubmersible 15-Dec-2014 Transocean Scrapped C. Kirk Rhein, Jr. Semisubmersible 18-Dec-2014 Transocean Scrapped Falcon 100 Semisubmersible 18-Dec-2014 Transocean Scrapped GSF Arctic I Semisubmersible 18-Dec-2014 Transocean Scrapped Sedco 601 Semisubmersible 18-Dec-2014 Transocean Scrapped Sedco 700 Semisubmersible 18-Dec-2014 Transocean Scrapped Sedco 703 Semisubmersible 18-Dec-2014 Transocean Scrapped Sedco 710 Semisubmersible 18-Dec-2014 Transocean Scrapped Sedneth 701 Semisubmersible 18-Dec-2014 Transocean Scrapped Sovereign Explorer Semisubmersible 18-Dec-2014 Transocean Scrapped Source: ODS-Petrodata

Asia Offshore and Marine Sector 13 06 January 2015

Theme #2 – Surge in Chinese rig deliveries There are 135 jackups scheduled to be delivered through 2017. In particular, 2015 will see a record of 72 jackup units delivered, of which only six have been contracted. The bulk of the jackup deliveries are concentrated in 2H15, with 18 jackups scheduled to be delivered in 3Q15 and 23 jackups in 4Q15.

Figure 26: Annual jackup deliveries by country Figure 27: Quarterly rig deliveries from 1Q13

80 25 23 22 70 7 20 60 18

50 7 15 15 42 2 15 40 13 5 12 12 7 30 4 24 10 10 10 2 10 9 9 4 8 6 13 20 5 7 6 1 5 3 3 4 28 23 6 23 3 10 10 6 18 1 5 4 11 13 13 3 14 5 3 1 1 8 6 5 2 0 2 20 3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 Singapore China Korea Others 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Source: ODS-Petrodata, Credit Suisse estimates Source: ODS-Petrodata, Credit Suisse estimates Of the 72 jackups due for delivery in 2015, 42 are due for delivery from Chinese yards, a sharp increase from the seven units delivered in 2013 and 18 units delivered in 2014. Hence, rather than addressing the issue of a surge in jackup deliveries, we believe the key issue here is a surge in Chinese jackup deliveries. The three leading Chinese offshore yards—China Merchant Heavy Industries, Dalian Shipbuilding and Yantai CIMC Raffles—are expected to deliver 27 jackup units, contributing close to 38% of total jackup supply growth. New entrants which have never delivered a rig are expected to deliver 6 jackup units, contributing close to 8% of total jackup supply growth. This would include Cosco Dalian, Shanhaiguan Shipbuilding, CSSC Guangzhou, and Yangzijiang Shipbuilding. Interestingly, we note that while 41 jackups were scheduled to be delivered in 2014 at the start of the year, only 31 were delivered eventually.

Figure 28: More than half of jackup rigs to be delivered in Figure 29: Top 3 Chinese yards represent 67% of jackup 2015 are from Chinese yards supply growth

45 42 12 11 10 40 10

35 8

30 6 6 25 4 21 4 3 20 2 2 1 1 1 1 1 1 15 0 10

3 5 2 2 1 1 0 China Singapore UAE Indonesia India Kazakhstan USA

Source: ODS-Petrodata, Credit Suisse research Source: ODS-Petrodata, Credit Suisse research Speculative orders make up most of jackups in order book Of the jackups due for delivery in 2015, 40% are speculative orders placed by new entrants. This includes companies such as Bestford Capital and Foresight Drilling, which have made use of attractive back-end loaded payment terms offered by Chinese yards. We see risk of potential cancellations if these customers are unable to secure attractive

Asia Offshore and Marine Sector 14 06 January 2015 resale prices in the second-hand market or charter contracts for the jackup units, which will limit their ability to get financing for the balloon payment.

Figure 30: Speculative orders make up most of deliveries Figure 31: Speculative orders make up most of jackups in in 2015 order book Middle East Hi-spec North 5% Sea 2% India 5% China SE Asia 6% 8% India Hi-spec 7% North Sea Speculative Speculative 37% SE Asia 40% 8% 8% China 8%

Competitive Middle East 13% 9%

Mexico Competitive Mexico 11% 14% 19%

Source: ODS-Petrodata, Credit Suisse research Source: ODS-Petrodata, Credit Suisse research Expect cancellations to accelerate as drillers prefer to place orders with established yards According to IHS-Petrodata, there were three order cancellations in December 2014, as K- Group and Polynor Drilling cancelled their contracts with China Merchants Heavy Industry. We note that these orders were placed as recent as in 1H14.

Figure 32: Rig order cancellations in December 2014 Order date Rig name Yard Manager Delivery date 15-Feb-2014 Polynor JU Tbn2 China Merchants Heavy Industry PolyNor Drilling 1-Sep-2015 24-Apr-2014 K-Group JU Tbn1 China Merchants Heavy Industry K-Group 31-Dec-2015 24-Apr-2014 K-Group JU Tbn2 China Merchants Heavy Industry K-Group 1-May-2016 Source: ODS-Petrodata We expect potentially more cancellations or delivery pushbacks as newbuild jackups struggle to be contracted upon delivery. We note that there were two jackups that were delivered without contracts in December, including Jindal Explorer which was built at Keppel FELS, and Prospector 6 built at Shanghai Waigaoqiao.

Figure 33: Jackup deliveries in December 2014 Delivery date Rig name Yard Manager Order date 5-Dec-2014 Jindal Explorer Keppel FELS Jindal Drilling 27-Feb-2013 24-Dec-2014 PROSPECTOR 6 Shanghai Waigaoqiao Shipbuilding Prospector Offshore Drilling 2-Aug-2011 Source: ODS-Petrodata At the same time, established drillers seem to be more interested in placing newbuild orders in established yards rather than to buy assets in the secondary market. Japan Drilling and National Drilling placed newbuild jackups with Keppel, Sembcorp Marine and Lamprell in 4Q14.

Asia Offshore and Marine Sector 15 06 January 2015

Figure 34: Jackup rig orders in 2H14 Order date Rig type Yard Manager Delivery date 31-Oct-2014 Jackup Keppel FELS Japan Drilling 1-Dec-2016 3-Nov-2014 Jackup PPL Shipyard Japan Drilling 31-Oct-2016 12-Nov-2014 Jackup Lamprell National Drilling 1-Oct-2016 12-Nov-2014 Jackup Lamprell National Drilling 1-Apr-2017 Source: ODS-Petrodata In Figure 35, we show the list of jackups to be delivered from Chinese yards in 2015, with the orders placed by speculative buyers highlighted. Figure 35: Jackup rig deliveries from Chinese yards in 2015 Order date Rig type Yard Manager Delivery date 26-May-2011 Jackup COSCO Qidong KS Drilling 31-Jan-2015 1-Mar-2012 Jackup CPLEC CPLEC 1-Jan-2015 1-Mar-2012 Jackup Dalian Shipbuilding Industry Co. CPTDC 1-Mar-2015 17-Apr-2012 Jackup Yantai CIMC Raffles Coastal Contracts 1-Feb-2015 15-May-2012 Jackup Dalian Shipbuilding Industry Co. CPTDC 30-Jan-2015 15-Jul-2012 Jackup CPLEC CPTDC 1-Apr-2015 13-Aug-2012 Jackup COSCO Dalian Foresight Drilling 1-Mar-2015 26-Sep-2012 Jackup Shanghai Zhenhua Heavy Industries ZPMC 5-Mar-2015 1-Oct-2012 Jackup China Merchants Heavy Industry UMW Offshore Drilling 15-Jan-2015 29-Nov-2012 Jackup Yangzijiang Shipbuilding Offshore Logistics 4-Aug-2015 28-Jan-2013 Jackup China Merchants Heavy Industry Bestford Capital 28-Feb-2015 28-Jan-2013 Jackup China Merchants Heavy Industry Bestford Capital 30-May-2015 31-Jan-2013 Jackup Dalian Shipbuilding Industry Co. Seadrill 1-Jun-2015 31-Jan-2013 Jackup Dalian Shipbuilding Industry Co. Seadrill 10-Feb-2015 5-Mar-2013 Jackup Dalian Shipbuilding Industry Co. Seadrill 1-Sep-2015 5-Mar-2013 Jackup Dalian Shipbuilding Industry Co. Seadrill 1-Dec-2015 18-Mar-2013 Jackup Shanghai Waigaoqiao Shipbuilding Prospector Offshore Drilling 1-Sep-2015 30-Mar-2013 Jackup China Merchants Heavy Industry Tianjin Haiheng 30-Jul-2015 30-Mar-2013 Jackup China Merchants Heavy Industry Tianjin Haiheng 1-Dec-2015 1-Apr-2013 Jackup CPLEC CPTDC 1-Oct-2015 4-Apr-2013 Jackup Yantai CIMC Raffles CIMC Raffles Offshore 1-Aug-2015 6-May-2013 Jackup CSSC Guangzhou Dockyards Alliance Offshore 30-Nov-2015 8-Jun-2013 Jackup Dalian Shipbuilding Industry Co. CPOE 18-Dec-2015 20-Jun-2013 Jackup Dalian Shipbuilding Industry Co. Seadrill 30-Dec-2015 1-Jul-2013 Jackup CPLEC CPLEC 1-Sep-2015 9-Jul-2013 Jackup Shanhaiguan Shipbuilding Industry Co., Ltd. FTS Derricks 1-Dec-2015 1-Aug-2013 Jackup COSCO Dalian Foresight Drilling 1-Sep-2015 12-Aug-2013 Jackup Shanghai Waigaoqiao Shipbuilding ESSM 31-Dec-2015 4-Sep-2013 Jackup China Merchants Heavy Industry Bestford Capital 30-Oct-2015 1-Oct-2013 Jackup China Merchants Heavy Industry PolyNor Drilling 1-Jul-2015 11-Oct-2013 Jackup China Merchants Heavy Industry Not known 15-Aug-2015 11-Oct-2013 Jackup China Merchants Heavy Industry Not known 31-Dec-2015 11-Oct-2013 Jackup Dalian Shipbuilding Industry Co. COSL 30-Sep-2015 18-Oct-2013 Jackup COSCO Dalian Momentum Drilling 10-Sep-2015 1-Nov-2013 Jackup Yantai CIMC Raffles Coastal Contracts 31-Dec-2015 10-Jan-2014 Jackup Yantai CIMC Raffles CSM 1-Dec-2015 10-Jan-2014 Jackup Yantai CIMC Raffles CSM 1-Dec-2015 1-Mar-2014 Jackup Dalian Shipbuilding Industry Co. Apexindo 1-Jul-2015 1-Apr-2014 Jackup China Merchants Heavy Industry Landmark Offshore 30-Oct-2015 1-Apr-2014 Jackup China Merchants Heavy Industry Landmark Offshore 31-Dec-2015 2-Sep-2014 Jackup Yantai CIMC Raffles CIMC Raffles Offshore 1-Oct-2015 Source: ODS-Petrodata

Asia Offshore and Marine Sector 16 06 January 2015

Theme #3 – First drillship delivered by Singapore yard Sembcorp Marine expected to deliver first drillship to Sete Brasil in mid-2015 Sembcorp Marine made a breakthrough in the drillship market through contracts with Sete Brasil for the construction of 7 drillship units to be built locally in Brazil, contracted at an average price of US$804 mn in 2011-12. The drillships are scheduled for delivery through to 2Q19, with the first unit Arpoador scheduled for delivery in mid-2015. Construction of Arpoador started in December 2011, and the drillship arrived in Brazil for integration and commissioning work in November 2014.

Figure 36: Progress of Sembcorp Marine's Arpoador Figure 37: Progress of Sembcorp Marine's Arpoador drillship drillship

Source: Sete Brasil Source: Sete Brasil We believe the successful delivery of the drillship will boost Sembcorp Marine's track record in the drillship market, which has been dominated by Korean yards. In 2014, Sembcorp Marine further won contracts from Transocean for two more drillship units, representing one-third of the six drillship orders placed in the year.

Figure 38: Annual drillship orders – By Units 100%

90% 6 10 2 80%

70%

60% 14 9 12 50% 2 16 2 6 2 26 16 40%

30%

20% 2 10% 6 2 1 2 1 0% 1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Singapore China South Korea Brazil

Source: ODS-Petrodata

Asia Offshore and Marine Sector 17 06 January 2015

Theme #4 – Pickup in M&A activity As with previous downcycles, we believe this one poses potential M&A opportunities for companies in the sector. Players with strong balance sheets could acquire companies to increase market share, access technologies, or expand into areas in which presence is lacking and/or which are targeted for growth. In Figure 39 we summarise major M&A activities following the global financial crisis.

Figure 39: Major Offshore and Marine M&A activities over 2007-11 Date Acquirer Acquiree Details Nov-07 Transocean GSF Corp Transocean announced a cash and stock deal with GlobalSantaFe Corp., creating a company with an estimated net asset value of $53 bn Sep-08 COSL Awilco China Oilfield Services Limited successfully completed its RMB17.1 bn acquisition into all shares of the Norwegian offshore drilling company Awilco Offshore ASA May-10 Seadrill Scorpion Offshore Seadrill acquired an additional 9,071,948 shares of Scorpion at NOK 40.5 per share, with a total ownership of 50.11% of all the issued shares in Scorpion. Jun-10 Noble Corp Frontier Drilling Noble Corp bought Frontier Drilling for $2.16 bn, adding seven vessels to its fleet Jul-10 Rowan Skeie Drilling Rowan completed the acquisition of Skeie Drilling for a purchase consideration of US$942.8 mn, including the assumption of US$539.9 mn of debt Feb-11 Hercules Offshore Seahawk Drilling Hercules Offshore acquired all of Seahawk's assets in a transaction valued at approximately $105 mn May-11 Ensco Pride Ensco agreed to buy Pride International (PI) for $7.3 bn in cash and stock. International Oct-11 Transocean Aker Drilling Transocean agreed to buy Aker Drilling ASA for 7.93 bn kroner ($1.46 bn) Source: Company data, Credit Suisse We have started to see a pickup in such activity in recent months. In November 2014, Halliburton announced a proposed acquisition of Baker Hughes Inc. for US$35 bn, which could have major implications for the broader sector in the form of potential divestitures. In the region, Falcon Energy Group offered to buy up the remaining 70.9% stake in CH Offshore at S$ 0.495 per share in December 2014.

Asia Offshore and Marine Sector 18 06 January 2015

Theme #5 – Watch Sete Brasil Sete Brasil is the Petrobras/Brazilian Government-backed entity created in 2010 as a vehicle to spearhead the construction of 29 locally-built drilling rigs. Specialised industry press (Upstream) and local Brazilian press (Folha de Sao Paulo) are increasingly reporting issues alongside a number of areas related to the construction of those 29 rigs – local shipyards are not delivering, rig-operating partners such as Petroserv and Etesco are getting out of the partnership, Sete Brasil is unable to obtain financing to construct the rigs, and the Federal Policy is also now investigating the validity of all the Sete contracts as part of the wider PBR-linked corruption allegations. Given the depth and reach of the problems being reported and the industry-wide implications, we believe investor caution is deserved.

Figure 40: 29 deepwater rigs under construction by Sete Brasil

Sete International GmbH

#1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 #14 #15 #16 #17 #18 #19 #20 #21 #22 #23 #24 #25 #26 #27 #28 #29

PB PB PB PB PB PB TBD QG PS QG PS QG O O O O O ET ET ODF SD ODF SD ODF SD PB ET ET ET

EAS Keppel FELS Paraguaçu Jurong Rio Grande

PB Petrobras O OOG SD Seadrill QG QGOG ET Etesco TBD To Be Determined PS Petroserv ODF Odjfell

Source: Sete Brasil Total capex for the 29 rigs was expected to be US$25.7 bn, which Sete Brasil intends to fund using 25% equity and 75% debt. Sete Brasil structured its funding based on two major providers of credit for the Brazilian naval projects, Merchant Marine Fund (FMM) and BNDES (Brazilian Development Bank). BNDES is the Brazilian government development fund, and is acting as senior lender and quasi-equity provider. BNDES has already approved the eligibility of 21 SPVs from Sete Brasil amounting to US$9.3 bn. In addition, US$4.6 bn has been secured from FMM, a major source of funding to the Brazilian marine industry. In addition, Sete Brasil has raised over US$4.6 bn of bridge loans with nine Brazilian and international commercial banks, in 6 bridge loan facilities, with take out from senior facilities.

Figure 41: Structure of Sete Brasil FIP 95% 5% Petrobras Sondas

Class A Shareholder Operators Class B Shareholder

Brazil 100%

Sete Holdco

Austria 70-85%

Netherlands 29 SPE 15-30%

Source: Sete Brasil

Asia Offshore and Marine Sector 19 06 January 2015

The 29 rigs have been further divided into three batches, according to due date for commercial operation, in order to facilitate the senior lenders approval process. Batch 1 consists of nine rigs due for delivery in 2015-16, batch 2 consists of 12 rigs due for delivery in 2017-19, while batch 3 consists of eight rigs due for delivery in 2018-20. US$3.7 bn of the funding from BNDES will allocated to the SPVs from the first batch. In our view, Sete Brasil's delicate position presents the likelihood of potential cancellations for some of the 29 deepwater rigs ordered. However, the contracts most at risk are the ones involving yards that have yet to start construction of the rigs, are facing execution challenges, and involved in the corruption investigation. Figure 42 to Figure 44 would show the list of 29 rigs across the three batches. Construction work has started on 16 of the 29 rigs, including four units by Keppel (BrasFELS) and four units by Sembcorp Marine (EJA). Interestingly we note that the rig Urca under construction by BrasFELS is due for delivery in December 2015 is 84% complete, while Copacabanca under construction by EAS is due for delivery in February 2016 and 44% complete.

Figure 42: Batch 1 of Sete Brasil rigs Batch 1 Shipyard Strike Steel Physical Completion Scheduled Delivery Local content (Oct 14) Arpoador EJA Oct-11 79.58% Jun-15 55% Urca BrasFELS Jul-12 83.87% Dec-15 55% Copacabana EAS Mar-13 43.59% Feb-16 55% Cassino ERG Jan-14 43.34% May-16 55% Grumari EAS Jul-13 31.98% Jul-16 60% Ondina Enseada Nov-13 46.72% Jul-16 55% Guarapari EJA May-13 54.41% Jul-16 55% Frade BrasFELS Jan-13 48.36% Dec-16 55% Camburi EJA Feb-14 30.31% Dec-16 60% Source: Sete Brasil

Figure 43: Batch 2 of Sete Brasil rigs Batch 2 Shipyard Strike Steel Physical Completion Scheduled Delivery Local content (Oct 14) Curumim ERG Oct-14 12.74% Mar-17 60% Ipanema EAS Feb-14 17.38% Mar-17 60% Pituba Enseada Sep-14 12.97% May-17 55% Bracuhy BrasFELS Feb-14 15.21% Aug-17 60% Itaoca EJA Oct-14 14.58% Aug-17 60% Salinas ERG Nov-17 60% Leblon EAS Oct-14 13.50% Nov-17 65% Boipeba Enseada Jan-18 60% Portogalo BrasFELS Sep-14 4.25% Apr-18 60% Leme EAS Jul-18 65% Mangaratiba BrasFELS Dec-18 65% Botinas BrasFELS Aug-19 65% Source: Sete Brasil

Asia Offshore and Marine Sector 20 06 January 2015

Figure 44: Batch 3 of Sete Brasil rigs Batch 3 Shipyard Strike Steel Physical Completion Scheduled Delivery Local content (Oct 14) Itaunas EJA Apr-18 65% Interlagos Enseada Sep-18 60% Marambaia EAS Dec-18 65% Siri EJA Dec-18 65% Itapema Enseada May-19 65% Joatinga EAS Jul-19 65% Sahy EJA Aug-19 65% Comandatuba Enseada Jan-20 65% Source: Sete Brasil Keppel is constructing six semisubmersible rigs worth US$4.9bn for Sete Brasil, representing about 35% of its newbuild orderbook. Sembcorp Marine is constructing seven drillships worth US$5.6 bn for Sete Brasil, also representing about 41% of its newbuild orderbook. Payment terms for the Sete Brasil rigs are based on milestone and have been cashflow positive for both companies so far. Figure 45: Keppel Corp orderbook breakdown Figure 46: Sembcorp Marine orderbook breakdown

UMW Oil & Gas BOT Lease Co. Bechtel Overseas 2% PV Drilling 3% Marco Polo 1% Clearwater 1% Hercules 2% Falcon Energy Parden 2% 2% 2% 1% Helix BOT Lease 3% 2% KazMunayGas North Atlantic Drilling 2% 4% Caspian Drilling 2% Pemex 3% Gulf Drilling International Prosafe 3% 4% Sete Brasil 35% Sete Brasil Ensco Perisai 3% 5% 41%

TS Offshore 4% Petrobras 5% Maersk Drilling 4% Det Norkse Floatel 5% 4%

Fecon Oro Negro 5% Transocean 8% 8% Golar 5% Transocean Noble Petrobras Grupo R 8% 9% 7% 7%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Asia Offshore and Marine Sector 21 06 January 2015 Stay defensive for now Given our bearish view on Brent in 1Q15, we maintain our defensive stance on the sector. Our preferred stocks fall into four baskets: (1) Stocks trading close to trough (2) Stocks which may benefit from a pickup in M&A activity (3) Stocks whose operations should be relatively un-impacted by oil price decline (4) Quality names at attractive valuation

Figure 47: Stock selection theme and stocks in basket Theme/Stock Comments Stocks close to trough Vard Stock at P/B of 1.0x, below 2011 low of 1.4x. Net cash position Beneficiaries of M&A activity Vard Fincantieri has a 55.63% stake and could increase its holdings Yantai Jereh With a strong balance sheet, company aims to grow oilfield services segment by 70% CAGR in 2014-18. Limited impact from lower Brent Dialog 62% of intrinsic worth is in tank terminals, with 29% in other midstream/downstream Yangzijiang Shipbuilding Limited exposure to oil and gas. Gradual reduction in non-core investments Strong franchise at low valuation Keppel Corp Dividend yield of above 5% supported by diversified earnings stream COSL Beneficiary of CNOOC’s increased focus on deep water exploration in South China Sea SapuraKencana Dayrates for tender rigs remained resilient in 08/09 crisis Source: Credit Suisse research Stocks close to trough Given uncertainty on the extent of capex cuts, we compare P/B of companies with their historical P/B lows. Stocks trading below their 08/09 lows include the Korean shipbuilders, companies with high leverage (Swiber, Aban, Ezra), or at risk of facing write-downs (Cosco Corp).

Figure 48: P/B % to 2008-09 Trough

4.5 150% * For Nam Cheong and Current PB (LHS) Historical Trough PB (LHS) % to Bottom (RHS) 4.0 Vard, historical trough PB obtained from 2011 100% 3.5

3.0 50% 2.5

2.0 0% 1.5

1.0 -50%

0.5

0.0 -100%

Ezra

Vard

COSL

Ezion

DSME

Perisai Swiber

COSCO

Wah Seong Wah

Yangzijiang

ASL Marine ASL

Keppel Corp Keppel

Alam Maritim Alam

Dialog Group Dialog

Nam Cheong Nam

Hyundai Mipo Hyundai

Hyundai Heavy Hyundai

Mermaid Marine Mermaid

Samsung Heavy Samsung

Sembcorp Marine Sembcorp

Mermaid Maritime Mermaid

Aban Offshore Ltd Offshore Aban Sembcorp Industries Sembcorp

Source: Thomson-Reuters, Credit Suisse estimates As shown in Figure 49, Vard is currently trading at a P/B of 1.0x, vs its 2011 low of 1.39x.

Asia Offshore and Marine Sector 22 06 January 2015

Figure 49: Vard P/B

3.00

2.50

2.00

1.50 2011 low: 1.39x

1.00 current: 1.00x

0.50 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14

Source: Company data, Credit Suisse estimates Beneficiaries of M&A activity Vard (OUTPERFORM, TP S$0.80) Fincantieri has a 55.63% stake in Vard, which it acquired in 2013 through a general offer together with a purchase of stake from STX Group. According to Credit Suisse Fincantieri analyst, Fincantieri will be cash-consuming in 2015 with 2016 being the big ‘cash year’ when they deliver seven cruise ships. However, the company intends to use construction loans to finance the working capital for cruise ships so their cash consumption can be reduced in the future. Currently, the company’s net debt/EBITDA is around 2x. We believe the acquisition of the remaining shares in VARD makes strategic sense for Fincantieri as it allows greater integration between the operations and also allows Fincantieri shareholders to enjoy the full benefit of the investment. Yantai Jereh (OUTPERFORM, TP RMB 50.00) Jereh is an oilfield equipment manufacturer that is stepping into the oilfield services business; the company targets to grow its oilfield services business by 70% CAGR from 2014-18. Jereh has a strong balance sheet to support M&A activities. The company is currently in a net cash position, with only Rmb20 mn long-term borrowings. As of June 2014, Jereh has Rmb4.3 bn (US$700 mn) cash on hand and generates c.Rmb500 mn (US$80 mn) of free cash flow per year. If we assume Jereh gears up to 30% net gearing, it could spare Rmb10 bn (US$1.7 bn) cash for acquisition. Little operational impact from oil price Dialog (OUTPERFORM, TP MYR 1.90) The rapid reversal of domestic investor sentiment on the O&G sector has resulted in both overreaction and collateral damage; Dialog has not been spared. Consider the facts: (a) 62% of intrinsic worth is in tank terminals, with 29% in other midstream/downstream (e.g. distribution, plant maintenance, catalyst handling), only 8% is in upstream; (b) Of that 8%, only ~2% is exposed to oil price risk; and (c) its excellent prospects remain unchanged with the nearest major catalyst (Phase 1 of the Pengerang deepwater petroleum terminal) on track to being fully operational in 1Q15. Yet the stock has fallen ~30% in the past 3 months. Dialog has a wide economic moat in the form of its tank terminals in Kertih and

Asia Offshore and Marine Sector 23 06 January 2015

Pengerang, and little exposure to E&P capex volatility; the higher quality of earnings more than offsets the lower apparent discount to intrinsic value (which is still ~40%). Yangzijiang Shipbuilding (OUTPERFORM, TP S$1.50) We expect Yangzijiang to benefit from ongoing consolidation in the Chinese shipbuilding sector and win a disproportionate share of new orders. At the same time, the key overhang for the stock in the past few years has been its investments in financial assets in China, but we expect that to be gradually reduced with the company’s plans to exit from non-core businesses. Valuation is attractive with a P/B of about 1.1x, close to the historical trough. Strong franchise at attractive valuation Keppel Corp (OUTPERFORM, TP S$12.50) About 65% of Keppel Corp's earnings come from the Offshore and Marine division, with Property, Infrastructure and Investments contributing the remaining. In the worst case scenario assuming no further new orders in 2015 and 2016 (vs S$5.0bn secured in 2014), Keppel's 2016 EPS could decline to S$0.79, 23% below our base case forecast. Based on a payout ratio of 50%, we expect dividend yield of above 5%, supported by monetising of assets in the Infrastructure division, as well as cashflow derived from recurring earnings of associated companies. At the same time, there should be limited cash outflow from capex for yard expansion or working capital requirements. Key risk is potential payment delays by Sete Brasil, which should be mitigated by its strong track record in the construction of semisubmersible rigs in the Brazilian market. SapuraKencana (SAKP MK, OUTPERFORM, TP: RM4.10) Slightly more than half of SAKP's earnings come from tender rigs. the resilience of these have been questioned, due to the severity of the drop in dayrates for deepwater rigs; in reality tender rig dayrates have stayed strong. Even during the GFC and its aftermath, dayrates for tender rigs continued to inch upwards whilst those of other more cyclical classes exposed to exploration capex plunged. However, to be conservative, we factor in a 10% decline in dayrates and utilisation of 80% after existing contracts expire, along with flattish margins. Our TP of RM4.10 implies a CY15 P/E of 16x. Even with this significant paring in expectations, we still see significant value in SAKP, which has endured stock- specific selling pressure (Shariah-related) during the onset of what could be a cyclical downturn. COSL (OUTPERFORM, TP HK$17.50) We continue to believe that COSL is poised to benefit from CNOOC’s increased focus on deep water exploration in South China Sea over the next three to five years. Moreover, the opportunity for COSL to substitute Nexen’s OFS providers in the UK North Sea is also beneficial to COSL, but generally ignored by the market. For example, COSL is exploring opportunities to deploy COSLPioneer to Nexen’s operations in UK North Sea during the current downtime. Despite our lowered earnings (-8% YoY in 2015), COSL should have the best YoY comp. vs the big three oils, which should see a 25% decline on average in 2015 (at $75 oil price assumption). Assuming an 8x bear-case valuation, current share price implies that COSL’s 2015 earnings will see a 20% decline YoY, which in our view is unrealistic. Our TP is based on 9x 2015 P/E, 1 standard deviation below historical P/E average. COSL–H is currently trading at 45% discount to the A share, highest discount over the past two years. Share price could be under pressure in the near term, but we think this poses a good opportunity for long-term investors to buy into a quality name at a compelling valuation.

Asia Offshore and Marine Sector 24 06 January 2015

Our least preferred stocks With the capex cuts in the sector, we believe cash will become a focus once again. In Figure 50 we show the net gearing of companies in the sector as of December 2013. Stocks which are most leveraged include Aban, Ezion, and Cosco Corp. Companies in a strong net cash position are Sembcorp Marine and Vard. From the 1H14 results, we have already witnessed a rapid deterioration in financial positions for the listed Chinese independent OFS providers. Account receivables have gone up across the board, a result of anti-corruption investigations delaying PetroChina’s payment to suppliers.

Figure 50: 2013 Net Debt-to-Equity

100%

78% 80%

60% 53% 53% 49% 49% 48% 45% 44% 43% 42% 42% 41% 38% 40% 36% 34% 33% 28% 27% 23% 22% 18% 20% 11% 7%

0% -3% -3% -20% -15% -15% -26% -40%

-49%

-60%

Ezra

Vard

COSL

MMHE

Swiber

COSCO

PT Logindo PT

Yangzijiang

ASL Marine ASL Seong Wah

Keppel Corp Keppel

Alam Maritim Alam

Dialog Group Dialog

Nam Cheong Nam

Bumi Armada Bumi

Hyundai Mipo Hyundai

Aban Offshore Aban

UMW Holdings UMW

Ezion Holdings Ezion

Hyundai Heavy Hyundai

Sapurakencana

Samsung Heavy Samsung

Mermaid Marine Mermaid

Pacific Radiance Pacific

Sembcorp Marine Sembcorp

Mermaid Maritime Mermaid

Perisai Petroleum Perisai Wintermar Offshore Wintermar Sembcorp Industries Sembcorp Source: Thomson-Reuters Anton (UNDERPERFORM, TP HK$1.40) Anton Oil's interest coverage ratio was at 1.7x as of 1H14, a level that raised concern as to whether the company would be able to meet its senior notes interest payment. Recall that the company issued US$250mn of 7.5% senior notes back in October 2013. Moreover, 1H14 saw an operating cash outflow of Rmb434 mn, up from Rmb2 mn cash outflow in 1H13. The company only has Rmb1 bn cash on hand as of 1H14. Should the OFS sector remain subdued for a longer period of time, which we believe it will be, the company’s working capital turnover could run into problems, and capital raising might be required. Cosco Corp (UNDERPERFORM, TP S$0.60) We believe Cosco Corp is most exposed to order cancellation risk due to its exposure to Sevan Drilling, Dalian Deepwater Development and ATP Oil and Gas. Offshore now contributes close to 80% of its revenue, and net gearing has increased due to backend- loaded payment terms for newbuild offshore projects. We expect further cash outflow in subsequent quarters as Cosco works on projects with backend-loaded payments terms. There are now three offshore projects that have been cancelled or are at a risk of cancellation by customers, including the Dalian Deepwater Development drillship (US$634 mn), ATP Octabuoy hull and topside (US$246 mn) and Sevan semi-submersible rig (US$525 mn). The Sevan Developer was supposed to be delivered in 2Q14, but delivery has been extended to up to 36 months from October 2014 as the unit remains unchartered.

Asia Offshore and Marine Sector 25 06 January 2015

Figure 51: Offshore & Marine Sector valuation comps Current Target Mkt Cap Ave 3M PE (x) PB (x) ROE (%) EV/EBITDA (x) Div Yield (%) Rating price price (US$m) T/O (mn) 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E 15E

Vard Holdings O 0.61 0.80 539 2.9 13.2 7.2 7.2 1.0 0.9 0.8 7.8 12.7 11.6 7.7 4.7 3.9 4.0 Ezion Holdings U 1.15 1.50 1,353 16.7 6.0 4.7 4.2 1.2 1.0 0.8 17.5 20.6 18.7 7.9 5.3 4.5 0.1 ASL Marine NR 0.48 n.a 152 0.0 8.5 8.7 8.7 0.5 0.5 0.4 n.a 5.4 5.2 n.a n.a n.a 3.1 Dyna-Mac NR 0.33 n.a 249 0.3 11.2 9.0 8.1 1.6 1.5 1.4 15.0 16.6 17.9 6.1 4.9 3.9 6.2 Ezra Holdings NR 0.54 n.a 411 3.2 8.2 5.9 4.9 0.4 0.3 0.3 4.6 5.9 6.6 9.7 7.8 6.7 1.3 Mermaid Maritime NR 0.31 n.a 323 0.3 7.3 6.2 5.3 0.6 0.6 0.5 8.5 8.9 9.2 7.8 10.1 14.1 2.6 Nam Cheong NR 0.33 n.a 472 2.8 5.7 5.6 5.2 1.5 1.3 1.1 29.5 24.9 22.5 6.4 6.1 5.2 3.9 PACC Offshore Services NR 0.56 n.a 756 1.0 9.5 5.5 4.7 0.6 0.6 0.5 7.6 10.9 11.2 9.7 6.3 5.3 1.2 Pacific Radiance NR 0.82 n.a 443 2.5 6.1 5.3 4.6 1.1 0.9 0.7 18.9 18.0 17.5 7.9 6.4 5.5 7.8 Swiber Holdings NR 0.29 n.a 130 0.6 n.m n.m n.m. 0.3 0.3 0.3 0.6 n.m 0.2 13.4 21.3 23.0 0.0 Triyards NR 0.53 n.a 129 0.2 4.4 3.6 n.m. n.a n.a n.a 16.8 16.7 16.0 n.a n.a n.a n.a Singapore Mid-Cap 8.0 6.2 5.9 0.9 0.8 0.7 12.7 14.1 12.4 8.5 8.1 8.0 3.0

Asia Offshore and Marine Sector 26 06 January 2015

Companies Mentioned (Price as of 04-Jan-2015) ASL Marine (ASLM.SI, S$0.48) Aban Offshore Ltd (ABAN.BO, Rs511.3) Alam Maritim (ALMT.KL, RM0.655) Anton Oilfield Services Group (3337.HK, HK$1.68) Atwood Oceanics, Inc. (ATW.N, $28.67) Baker Hughes Inc. (BHI.N, $56.17) Bumi Armada Bhd (BUAB.KL, RM1.13) CN Rongsheng (1101.HK, HK$0.75) COSCO Corporation (Singapore) Ltd (COSC.SI, S$0.57) CSSC Holdings (600150.SS, Rmb36.86) China Oilfield Services Ltd (2883.HK, HK$13.8) China Shipbuilding Industry Company Limited (601989.SS, Rmb9.21) Dialog Group Bhd (DIAL.KL, RM1.52) Diamond Offshore Drilling, Inc (DO.N, $37.23) Dyna-Mac Hldg (DMHL.SI, S$0.325) Ensco Plc. (ESV.N, $30.17) Ezion Holdings Ltd (EZHL.SI, S$1.14) Ezra Holdings Ltd (EZRA.SI, S$0.54) GZ Shipyard (600685.SS, Rmb35.62) Guangzhou Shipyard International Company Limited (0317.HK, HK$22.7) Gulf Marine (GMS.L, 102.0p) Halliburton (HAL.N, $39.49) Hercules Offshore (HERO.OQ, $1.03) Hyundai Heavy Industries (009540.KS, W112,000) Hyundai Mipo Dockyard (010620.KS, W67,700) IHI (7013.T, ¥617) Kawasaki Heavy Industries, Ltd. (7012.T, ¥553) Keppel Corporation (KPLM.SI, S$8.86) Logindo Samudra (LEAD.JK, Rp2,790) Malaysia Marine and Heavy Engineering Holdings Bhd (MHEB.KL, RM1.75) Mermaid Marine Australia (MRM.AX, A$1.22) Mermaid Maritime (MMPC.SI, S$0.305) Mitsubishi Heavy Industries (7011.T, ¥670) Nam Cheong (NMCG.SI, S$0.33) Noble Corporation (NE.N, $16.84) Origin Energy (ORG.AX, A$11.86) POSH (PACC.SI, S$0.555) Pacific Radiance (PACI.SI, S$0.815) Perisai Petroleu (PPTB.KL, RM0.47) Rowan Companies (RDC.N, $23.72) Saipem (SPMI.MI, €8.78) Samsung Heavy Industries (010140.KS, W19,650) SapuraKencana Petroleum Bhd (SKPE.KL, RM2.35) Seadrill (SDRL.N, $12.01) Sembcorp Industries Limited (SCIL.SI, S$4.46) Sembcorp Marine Ltd. (SCMN.SI, S$3.29) Subsea 7 S.A. (SUBC.OL, Nkr77.25) Swiber (SWBR.SI, S$0.285) Technip (TECF.PA, €49.26) Transocean Inc. (RIG.N, $18.12) Triyards (TRIY.SI, S$0.53) UMW Oil & Gas (UMOG.KL, RM2.39) Vard Holdings Ltd (VARD.SI, S$0.61) Wah Seong Corporation (WAHE.KL, RM1.23) Wintermar Offshr (WINS.JK, Rp785) Yangzijiang Shipbuilding (Holdings) Ltd (YAZG.SI, S$1.21) Yantai Jereh Oilfield Services Group Co. Ltd (002353.SZ, Rmb30.57)

Disclosure Appendix Important Global Disclosures Gerald Wong, CFA and Muzhafar Mukhtar, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

Asia Offshore and Marine Sector 27 06 January 2015

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (54% banking clients) Neutral/Hold* 37% (50% banking clients) Underperform/Sell* 14% (43% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names The subject company (0317.HK, 010140.KS, 010620.KS, 009540.KS, 2883.HK, SDRL.N, SPMI.MI, ORG.AX, SKPE.KL, ATW.N, BUAB.KL, HERO.OQ, NE.N, RIG.N, DO.N, SCMN.SI, VARD.SI, KPLM.SI, EZHL.SI, HAL.N, BHI.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (0317.HK, 010140.KS, 010620.KS, 009540.KS, 2883.HK, SDRL.N, SKPE.KL, BUAB.KL, HERO.OQ, RIG.N, DO.N, SCMN.SI, VARD.SI, KPLM.SI, EZHL.SI, HAL.N, BHI.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (ORG.AX) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (0317.HK, 009540.KS, 2883.HK, SDRL.N, BUAB.KL, HERO.OQ, RIG.N, VARD.SI, KPLM.SI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (0317.HK, 010140.KS, 010620.KS, 009540.KS, 2883.HK, SDRL.N, SKPE.KL, BUAB.KL, HERO.OQ, RIG.N, DO.N, SCMN.SI, VARD.SI, KPLM.SI, EZHL.SI, HAL.N, BHI.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0317.HK, 010140.KS, 010620.KS, 009540.KS, 7012.T, 7013.T, 7011.T, 2883.HK, MHEB.KL, SDRL.N, SPMI.MI, ORG.AX, SKPE.KL, ATW.N, BUAB.KL, HERO.OQ, RIG.N, DO.N, SCMN.SI, VARD.SI, YAZG.SI, 3337.HK, DIAL.KL, KPLM.SI, EZHL.SI, HAL.N, BHI.N) within the next 3 months.

Asia Offshore and Marine Sector 28 06 January 2015

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ORG.AX) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (SDRL.N, ESV.N, RDC.N, ATW.N, HERO.OQ, NE.N, RIG.N, DO.N, HAL.N, BHI.N). Credit Suisse may have interest in (MHEB.KL, SKPE.KL, BUAB.KL, DIAL.KL) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (ABAN.BO, 2883.HK, RIG.N). Credit Suisse has a material conflict of interest with the subject company (7013.T) . Credit Suisse AG is acting as an advisor to the shareholders of Ionbond AG in the potential acquisition by IHI Corporation and is also a shareholder of Ionbond AG. Credit Suisse has a material conflict of interest with the subject company (RIG.N) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program for capital reduction purposes.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0317.HK, 601989.SS, 010140.KS, 010620.KS, 009540.KS, 7012.T, 7013.T, 7011.T, ABAN.BO, 2883.HK, MRM.AX, MHEB.KL, SUBC.OL, SDRL.N, SPMI.MI, ESV.N, ORG.AX, SKPE.KL, TECF.PA, RDC.N, ATW.N, BUAB.KL, HERO.OQ, NE.N, RIG.N, DO.N, SCIL.SI, SCMN.SI, VARD.SI, YAZG.SI, 002353.SZ, 3337.HK, COSC.SI, DIAL.KL, KPLM.SI, EZHL.SI, HAL.N, BHI.N) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (SDRL.N, SPMI.MI, TECF.PA). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0317.HK, 601989.SS, 009540.KS, 2883.HK, SDRL.N, ATW.N, BUAB.KL, HERO.OQ, RIG.N, DO.N, VARD.SI, KPLM.SI, HAL.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Horace Tse Credit Suisse Securities (Malaysia) Sdn Bhd...... Muzhafar Mukhtar, CFA Credit Suisse AG, Singapore Branch ...... Gerald Wong, CFA ; Shih Haur Hwang

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

Asia Offshore and Marine Sector 29 06 January 2015

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