· Oil services & equipment providers likely to outperform on earnings recovery (ASL, Ezra) and sustainable earnings growth (Ezion, Jaya)

· Singapore rigbuilders, KEP and SMM, are key beneficiaries of an expected return of semisub orders

Sector fundamentals intact; 2013 to be another good year. We believe 2013 could be another strong year for Offshore & Marine companies as sustained high oil prices continue to underpin investment into the sector. Despite ongoing macro uncertainties, our checks with offshore contractors indicate no apparent impact on offshore activity levels as oil companies continue to focus on executing existing projects and bringing new reserves into production. Taking the cue once again from oil majors, we note stable to increasing capex budgets for 2013, as they face an urgent need to reverse declining production volumes.

Oil services & equipment providers to outperform rigbuilders on recovering earnings, sustained growth, and improving earnings visibility. The oil services & equipment providers under our coverage are still trading below their historical average P/BV of 1.6x, while earnings are projected to recover 29% y-o-y in FY13F, reversing FY12’s decline. We believe this would result in an expansion of ROEs and P/BV multiples, driving upside from current share price levels. Recovering earnings (ASL, Ezra, Jaya), sustainable earnings growth (Ezion, Jaya), and steady contract wins (Ezion, Ezra) leading to improving earnings visibility are expected to be the key drivers of outperformance.

Return of semisubmersible rig orders as capacity tightens. We note signs of a return of newbuild semisubmersible orders, and believe this will gain further momentum across 2013 on 1) strong end-user demand, with available capacity in 2013/14 gradually taken up; 2) favourable economics for newbuild deepwater rigs on stable yard prices and strengthening day rates; and 3) replacement of aged units. We believe Keppel Corpand SembCorp Marine are key beneficiaries due to their proven track record and well accepted designs.