Offshore & Marine - CIMB Research 2015-12-03: More distressed rigs for sale

Offshore & Marine - CIMB Research 2015-10-15: Brazilian real-ity hits Offshore & Marine SEMBCORP MARINE LTD S51.SI  KEPPEL CORPORATION LIMITED BN4.SI 

Offshore & Marine - More distressed rigs for sale 

  • The standstill agreement (read: cancellation) with North Atlantic Drilling for a semisub could be the culprit behind SMM’s recent profit warning. 
  • This could be the last high-risk non-Brazilian rig that requires profit reversal. 
  • Keppel may not be spared; seven non-Brazilian rigs its order book may see more push-back or cancelation. 
  • Maintain Underweight on the sector. 

Standstill agreement, but we read it as cancellation 

  • SMM and Seadrill subsidiary North Atlantic Drilling (NAD) have agreed on a standstill period until June 2016 for the delivery of a semi-sub drilling rig, West Rigel (contracted at US$568m). The rig was originally scheduled for delivery in 2Q15. NAD will continue to market the rig for an acceptable drilling contract while SMM has the right to sell it at an acceptable price. 
  • In the event of no rig employment or no sale, the two companies will form a joint asset holding company for ownership of the rig where SMM will have 77% ownership and NAD retains 23%. 

Rig auction 

  • At 13% EBIT margin and assumed 100% recognised, SMM may reverse S$92m in 4Q15 for West Rigel. It has collected c.US$130m based on the 20/80 payment terms. 
  • In the worst case scenario of zero-profit cost recovery, SMM can sell the rig at US$365m (total project cost of US$495m less US$130m collected). This represents a c.50% discount on the average cost (US$715m) for a 6th generation semi-sub ordered during 2010-13. However, we think this is unlikely and believe SMM could be asking for US$495m-530m. 

High-risk non-Brazilian contracts flushed out for SMM, for now 

  • In our SMM downgrade report (Mar 15), we highlighted West Rigel as a high-risk contract, along with Oreo Negro, Marco Polo and Perisai rigs, all of which have seen profit reversals/cancellations in recent months. 
  • West Rigel could be the last high-risk project on its book. In 2016, SMM is due to deliver a CJ 70 rig to Noble in 2Q16 (backed by charter with Statoil) and a jack-up to Japan Drilling (backed by BOTL financing). 
  • Delivery of the two high-risk Transocean drillships have been deferred to 2018-19. 

KEP not spared 

  • KEP has seven non-Brazilian rigs that could face more deferrals or cancellations– three jack-ups (JU) to Mexican Grupo R (deferred to 1Q16), and a JU each to Falcon Energy (ready stacked), Parden Holdings (deferred to 1Q16), Mexican Perforadora Central, and Clearwater. 
  • In the worst case of outright cancellations, total EBIT impact could come to S$330m or 45% of O&M profit or 25% of group profit for FY16. 
  • Realistically, we believe deferrals are more likely and expect to see some profit reversals in 1H16. 

Brazilian angsts 

  • We believe settlement for the Sete Brasil rigs is beyond bridging loan and restructuring at Sete Brasil’s level but looms across 
    1. ongoing Petrobras corruption probe, 
    2. political uncertainty due to the impeachment of President Dilma Rousseff, and 
    3. Brazil’s fiscal shake-up as amid a plunging real. 
  • The rigs were awarded at c.US$800m/each and were to be chartered to Petrobras at US$530k/day. As day rates have since plunged 20%, we question the ‘realisable’ value of the rigs which may lead to provision for impairment. 

Maintain Underweight 

  • With no reprieve from negative newsflows, we expect the sector to remain under pressure amidst a lower-for-longer oil price environment. 
  • Our top pick in the sector is SCI in view of its utilities earnings and potential dividend from divestment gain but near term share price performance could be affected by negative spillover from SMM. 
  • Rerating catalysts for SMM could come from potential super profits upon successful sale of the cancelled rigs in upcoming quarters.

Highlighted companies 

Keppel Corporation HOLD, TP S$7.12, S$6.53 close 

  • We maintain our Hold call and RNAV based target price, as we believe there could be value proposition from divestment of non-core assets. 
  • Near-term share price could have negative spill over from SMM. 

Sembcorp Marine REDUCE, TP S$1.88, S$1.97 close 

  • Our target price is based on SMM’s longterm -1 s.d of 11x CY17 P/E. 
  • Negative development from Sete Brasil’s contracts could further de-rate the stock to -2 s.d. or 7.7x CY17 P/E or S$1.31.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-12-03
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 7.12 Same 7.12
REDUCE Maintain REDUCE 1.88 Same 1.88