Sembcorp Marine - CIMB Research 2017-02-07: Seadrill rig impact

Sembcorp Marine - CIMB Research 2017-02-07: Seadrill rig impact SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Seadrill rig impact

  • Sembcorp Marine (SMM) has an undelivered semi-sub to North Atlantic Drilling (Seadrill’s subsidiary). The rig is completed with 20% downpayment received and profit reversed.
  • We estimate that SMM has recognised c.US$130m worth of provisions for the rig, representing c.23% discount to the contract value in 4Q15.
  • The rig is under an extended standstill agreement until Jul 17. If both parties decide not to extend the agreement, SMM will take on 77% ownership (US$437m).
  • We believe SMM has the option to sell at cost or charter the unit (in partnership with another operator) to cover loan and operating costs.
  • Maintain Add and target price (S$1.70), based on 1.3x FY17 P/BV (1 s.d. below mean).
  • Delivery of rigs and higher-than-expected order win are key catalysts, in our view.

Seadrill restructuring update

  • Seadrill’s share price has tumbled by c.45% since its announcement on restructuring on 31 Jan. Seadrill embarked on negotiations with bondholders and lenders in 2016 to extend maturities and revise its debt profile. Seadrill aims to raise at least US$1bn in new capital via the exercise (significant dilution expected).
  • Bondholders and certain lenders are required to convert their bonds into Seadrill shares. The complexity of the exercise may postpone the completion of restructuring beyond the original target of Apr 17.

SMM has a standstill agreement with North Atlantic for a semi-sub 

  • SMM has an undelivered harsh environment semi-sub rig, West Rigel to North Atlantic Drilling Ltd (NADL), Seadrill’s 70%-owned subsidiary. The rig was awarded at US$568m in 2012 with original delivery in 2Q15. The rig is built for harsh water depth of 10,000ft.
  • In Oct 16, SMM and NADL entered into a six-month standstill agreement, which was extended recently to 6 Jul 17. During the agreement period, NADL will market the rig for an acceptable drilling contract and SMM has the right to sell the rig at an acceptable price. The rig will remain in SMM’s yard. In the event that no contract is secured and no alternative transaction is completed when the standstill period comes to an end, the parties will co-own the rig (23% by NADL and 77% by SMM).
  • Post-formation of joint asset company, NADL will continue to market the rig for charter and SMM will continue to market the rig for sale.
  • In 4Q15, SMM booked provisions of S$280m (c.US$200m) for inventory, receivables and profit reversal for NADL, Marco Polo and three of its speculative built rigs (partially completed). 
  • Of this, we estimate that about US$130m was for NADL.

Possible scenarios and impact on SMM 

  • At 77% stake, SMM could book the rig at a value of c.US$437m, representing a 24% discount to average semi-sub costs (with similar water depth of 10k-12k ft) ordered since 2005. We deem this reasonable, given the current climate and no impairment required.
  • In the worst-case scenario, we believe SMM/NADL has the option to engage an operating company to charter the unit at c.US$300k/day (to cover financing and operating costs), at the lowest end of existing market rates. 
  • Odjfell has a 7-year old 10,000ft semi-sub chartered to Statoil at US$301k/day up to 2019. 
  • Other similar capacity semi-subs are fetching an average rate of US$398k/day.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-07
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