Sembcorp Marine - CIMB Research 2017-10-08: What A Relief!

Sembcorp Marine - CIMB Research 2017-10-08: What A Relief! SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - What A Relief!

  • Sembcorp Marine (SMM) is likely to re-rate on the back of:
    1. sale of nine undelivered rigs and
    2. improved balance sheet.
  • Our forecast that Sembcorp Marine could dispose of its jack-up rigs at US$145m per rig was spot on -- refer to our report “Can Sembcorp Marine (SMM) fetch US$145m per jack-up?” .
  • Sembcorp Marine (SMM) announced on Friday night that it is selling nine jack-up rigs to Norwegian Borr Drilling for c.US$1.3bn, implying US$144m per rig.
  • We estimate net gearing to improve to 0.7x if most of the US$500m down-payment is used to settle its debts. The remaining US$800m will be paid over the next five years.
  • Maintain Add, with a higher target price of S$2.51, now based on 2x P/BV (from 1.5x).

SOLD! Net gearing to improve to 0.7x 

  • Sembcorp Marine (SMM) has signed agreements for the sale of nine jack-up rigs (JUs) to Norwegian Borr Drilling at US$1.3bn, or US$144m each rig. Sembcorp Marine (SMM) will take in S$15m loss from the transaction. 
  • Delivery of these rigs will take place from 4Q17 to 1Q19. An upfront US$500m down payment will be paid now and the balance c.US$800m will be paid at any time within five years from the respective deliveries. 
  • We estimate net gearing to improve from 1.3x (as at end-2Q17) to 0.7x, using the proceeds to pay down debt.

Packaged deal cheap, but at minimal loss 

  • The nine rigs comprised six terminated contracts - one from Marco Polo, two from Perisai and three from Oro Negro - as well as three speculative builds by Sembcorp Marine (SMM)
  • The rigs are sold at c.32% discount to average contract price of c.US$210m per rig during 2013/2014. They are also cheaper than the five Super B rigs that Keppel O&M sold to Borr Drilling in Mar 17 at US$216m per rig. US$144m is the floor that Sembcorp Marine could let go without incurring major losses (other than the S$15m above), based on EBIT margin of 12-15%.

Overhang removed on further impairment 

  • By letting these rigs go, the fear of further impairment due to undelivered rigs is removed. Sembcorp Marine (SMM) still has one completed/undelivered semi-submersible, for North Atlantic, and four drillships for Sete Brasil; all have been provided for. 
  • The best case scenario is that SMM sells the semi-subs at a floor price of US$408m (originally contracted at US$568m), based on 10% net margin and 20/80 payment terms. 
  • The final outcome of the long-drawn restructuring of Sete Brasil would be another re-rating catalyst, in our view.

Industry troughed when speculators are out 

  • We take the cue from Borr Drilling’s aggressive acquisition trail since Jan 17 that the exploration and production (E&P) cycle is turning. The Norwegian driller is founded by ex- Seadrill management and 20% owned by Schlumberger
  • Including SMM’s rigs, Borr Drilling have spent US$2.7bn to acquire 22 premium JUs, or US$125m per rig, 80% discount to the last peak price of c.US$226m. 
  • In the hay days, Seadrill was always ahead of the game, ordering before a rig boom. We think Borr Drilling is mimicking the strategy.

Maintain Add, target price raised to S$2.51, based on 2x P/BV 

  • Yards may not see a surge in rig orders as the global rig market is still in a surplus state ( > 100 rigs unchartered). But we see
    1. sale of undelivered rigs,
    2. improving net gearing, and
    3. potential completion of Sete Brasil rigs 
    as major re-rating catalysts for Sembcorp Marine (SMM)
  • Its YTD order win of c.S$270m excludes a potential c.S$600m contract for compressed gas liquid (CGL) carriers from SeaOne Caribbean; we keep our S$1.5bn order forecast. 
  • Our revised 2x P/BV valuation is based on 20% discount to SMM’s 20-year average of 2.5x.

Borr Drilling + Schlumberger = the next rig giant 

  • Borr Drilling was founded by Tor Olav Trøim, the former right-hand man of oil tanker and shipping magnate John Fredriksen in Seadrill. Trøim was the Vice President and a director of Seadrill between 2005 and 2014. The current CEO of Borr Drilling is Simon Johnson, who was the Vice President of Marketing & Contracts for Nobel Corporation. 
  • Borr Drilling has been bankrolled by investment fund Magni Group before attracting 20% investment from Schlumberger in Mar 17. We think Schlumberger plus Borr Drilling could be the next drilling rig giant as the former has also acquired drilling equipment maker Cameron in 2016. 
  • Note that SMM’s Pacific Class JUs are largely equipped with Cameron blowout preventer (BOP) and drilling package.

Borr Drilling is simulating Seadrill’s path 

  • Borr Drilling is issuing 162.5m new shares, raising US$650m to fund the acquisition. 
  • It first purchased two KFELS Super A JU (built in 2013) from the bankrupt Hercules Offshore in Jan 17 for US$155m. This was followed by the acquisition of 15 high-specification JUs from Transocean (including five being built in Kepepl O&M) in Mar 17 for US$1.35bn. Together with SMM’s rigs, Borr Drilling will own 22 premium JUs, all less than five years old.
  • We note that Seadrill’s pattern had always been the first mover in locking in newbuild prices ahead of the industry, before any rig cycle boom. It did that in 2005 and 2010.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-10-08
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.51 Up 1.870