Sembcorp Marine - CIMB Research 2017-12-26: Thank You, Santa!

Sembcorp Marine - CIMB Research 2017-12-26: Thank You, Santa! SEMBCORP MARINE LTD S51.SI

Sembcorp Marine - Thank You, Santa!

  • Sembcorp Marine (SMM)’s net gearing could improve to < 1x with the US$500m sale of a completed semisubmersible, West Rigel. The price is at a 12% discount to the original contract price.
  • SMM will incur S$24m loss from the sale and the proceeds will be split based on 23% (North Atlantic) and 77% (SMM) under the joint-asset agreement.
  • More importantly, we believe this represents the return of drilling activities in deeper waters at the current oil price. 
  • Maintain ADD and Target Price of S$2.49.

Net gearing to improve to below 1x with split proceeds

  • Sembcorp Marine (SMM) has signed an agreement for the sale of a semi-submersible (semi-sub) to an unnamed buyer for US$500m. The unit was previously contracted to Seadrill’s subsidiary, North Atlantic at a shipyard construction cost of US$568m in Apr 2012 for 2Q15 delivery. 
  • West Rigel is a 6th generation harsh-environment semi-sub with drilling water depths of up to 10,000ft. The all-in cost (plus equipment and project management) for North Atlantic Drilling (NAD) was c.US$710m. 
  • West Rigel’s standstill agreement has been extended multiple times, while it was looking for a new owner/charter contract. It was agreed in Dec 15 that in the event that no transaction is completed when the standstill period concludes, both Sembcorp Marine (SMM) and North Atlantic Drilling (NAD) will form a joint asset company with 23% ownership by NAD and 77% by Sembcorp Marine.
  • Due to the split ownership and implied selling price of US$385m (77% of US$500m),  Sembcorp Marine (SMM) will incur S$24m loss if the sale materialises. However, we believe this is immaterial vs. the improvement in balance sheet.
  • The current sale proceeds will be paid progressively and are subject to conditions precedent being met by both parties. Once the conditions precedent are fulfilled, the buyer will take delivery of the unit but it will remain in Sembcorp Marine for certain works to be undertaken for reactivation. We believe the unit will be delivered at the earliest in 2H18.
  • We estimate net gearing to improve to c.0.9x with the proceeds (c.US$385m based on 77% of US$500m) if debt is paid down. As of 3Q17, Sembcorp Marine’s net gearing stood at 1.3x before the other US$500m receipt from Borr Drilling (from the sale of 9 jack-up rigs).

No more overhang from “risky” rigs

  • This sale concludes the sale of all of the “risky” rigs built by Sembcorp Marine that were deferred due to the oil price crash in 2015.
  • One possible negative overhang for now is the Brazilian corruption investigations, in which Sembcorp Marine is said to be involved but investigations are still on-going with no further developments so far.

Drilling cycle to return?

  • There has been no semi-submersible order since 2014. We believe this sale suggests that the deep-water drilling segment is seeing some interest at the current oil price.
  • US$500m price tag is slightly below the mean price (US$514m) achieved for a semisub in the bull cycle in 2007. It is also at a 29% premium to the US$385m price of a semi-sub built post the Global Financial Crisis in 2009 (ordered by Petroserve and built in Korea).
  • Unlike jack-up rigs, there are only 27 undelivered semi-subs (excluding Sete Brasil’s units). However, 13 of those 27 units were built in China which may be less marketable. We believe this could spell hope for a gradual return of semi-subs orders to the Singapore yards.

Maintain ADD and target price of S$2.49

  • With the recent US$490m FPSO contract from Statoil, we estimate Sembcorp Marine’s order wins in 2017 to be at S$930m. We believe Sembcorp Marine is in the running for more than US$5bn of non-drilling contracts with a significant portion expected to materialise in 2018.
  • Our Target Price is unchanged and still based on 2x FY18F P/BV, 20% discount to its 20-year average of 2.5x. 
  • Risks include sudden oil price plunge.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-12-26
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.490 Same 2.490