Offshore & Marine - Maybank Kim Eng 2016-03-09: Delivery Deferments Rising

Offshore & Marine - Maybank Kim Eng 2016-03-09: Delivery Deferments Rising KEPPEL CORPORATION LIMITED BN4.SI  SEMBCORP MARINE LTD S51.SI 

Offshore & Marine Sector Flash: Delivery Deferments Rising 

Transocean defers rigs yet again 

  • Transocean has delayed its five jackup rigs under construction by Keppel again. The USD1.1b contract was inked in Nov 2013 for initial deliveries over 1Q16-3Q17 and included options for five more units. 
  • Deliveries have already been deferred twice before. The latest deferment will push rig delivery dates from 2018 to 2020. 
  • We believe that not much work has started on the rigs and thus no significant working capital is being locked up in those rigs yet. 
  • Initial estimated impact on our FY17-18 EPS forecasts for Keppel is about -6%. 
  • More importantly, this development supports our negative view on the rigbuilders. 
  • Reiterate SELL on Keppel Corp (TP SGD4.24) and Sembcorp Marine (TP SGD1.00)

Symptomatic of a deeper malaise in the rig market 

  • In our view, Transocean is essentially saying that they do not need any new rigs until 2020. Given that jackup rigs need two years to construct, this may imply that the rig-building industry may not see a meaningful recovery in rig orders until 2018. 
  • In a way, a deferment for an extended period is not much different from cancelling the contract and making a fresh order again much later. Although yards do get a small compensation in some cases. 

There were other deferments 

  • There were in fact other recent delivery deferments for the Singapore rigbuiders: 
    1. Ensco has deferred a USD225m jackup with Keppel from 2Q16 to 1Q18 and 
    2. Helix has delayed its USD346m semi-sub well intervention rig with Sembcorp Marine from mid-2017 to end-2018. 
  • SMM will charge Helix USD28.4k/day once construction is completed. 

Rig market weakness unaltered by recent oil bounce 

  • In our view, the magnitude of the recent oil bounce is insufficient to alter the fundamental weakness of an oversupplied rig market, coupled with fragile drilling demand. Unless oil price can rally rapidly pass the USD60/bbl level on a sustained basis, the rig market will have to grapple with an oversupplied situation over the next two years. 
  • Without a return in new orders, rigbuilders are unlikely to deliver meaningful EPS growth but would instead face downward pressure from more deferments or even cancellations. Therefore, we are of the view that any stock price bounce that rides purely on the notion that an oil price rebound should drive a valuation re-rating may not be sustained if EPS subsequently disappoints.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-03-09
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 4.24 Same 4.24
SELL Maintain SELL 1.00 Same 1.00