Near-term woes to be followed by long-term improvement in fundamentals

- "In this week’s Oil Insights, we revisit the near- and long-term prospects for the seismic sub-sector. Since the Gulf of Mexico Oil Spill began, both PGS and CGG Veritas have lost over a third of their market cap, underperforming the rest of the sector by 20%. While the market is correct to be concerned by the near-term woes of the seismic operators, we look beyond 2010 and see light at the end of the tunnel, expecting material improvement in both the level of multi-client spend as well as the supply/demand dynamics in the contract market. As a result, we believe that the seismic market is likely to show the greatest incremental improvement of any sub-sector within oil services over the next 12-18 months. We reiterate our Buy on PGS, with the view that it offers the best leverage to this more favourable longer-term trend."
- New capacity and Gulf spill continue to depress market "We expect that 2010 will end up being the most significant year of new vessel supply in recent history, with a 30% y-o-y net increase in streamer count. In a period of relatively stable demand, it is no surprise that contract margins have been depressed and are likely to continue to remain low until at least end-2010, a situation further exacerbated by the Gulf spill."
- But we expect supply/demand to improve in 2011+ "Beyond 2010, the supply growth impacting the contract market should begin to slow dramatically. Over the course of 2011-12, the current plans of seismic companies imply at most a 5% pa increase in the new streamer count. Hence, 2011 is likely to see the seismic contract market driven far more by demand than supply, suggesting the potential for margin improvement."
- Multi-client sales delayed but not disappeared "Multi-client sales have always been very volatile and difficult to predict. But given the number of licensing rounds that are open today and expected in coming months, we take the view that it is difficult for the level of multi-client late sales to become materially worse from here and that a gradual improvement is more than likely."

Nomura Oil Insights 20100816

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