Offshore & Marine - CIMB Research 2018-03-02: Hope To Restart Work For Petrobras But May Take Time

Offshore & Marine - CIMB Research 2018-03-02: Hope To Restart Work For Petrobras But May Take Time KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP MARINE LTD S51.SI

Offshore & Marine - Hope To Restart Work For Petrobras But May Take Time

  • Upstream reported that Petrobras and Sete Brasil have reached an agreement to build and deliver 4 drilling units.
  • We believe the units are likely semi-subs that belong to Keppel Corp (Urca and Frade) and Sembcorp Marine (Arpoador and Guarapari), which are largely completed.
  • We also believe the finalisation of construction could still take a while depending on financing structure. There have been no announcements by Keppel Corp / Sembcorp Marine.
  • Maintain OVERWEIGHT on the sector, with order wins as the key catalyst.

Potential to complete four Sete Brasil rigs

  • Petrobras and local rig-chartering entity Sete Brasil have reached a key agreement that calls for the construction and delivery of four drilling units, likely to be those that are in advanced stages – Keppel Corp’s semi-submersibles (Urca and Frade) and Sembcorp Marine’s drillships (Arpoado and Guarapar).
  • Sete Brasil, which has been under bankruptcy protection since April 2016, will keep the charter referring to four drilling rigs while terminating the contracts for another 24. Sete Brasil originally ordered the construction of 29 rigs – one on speculation – with five Brazilian shipyards for day rates of between US$344k/day and US$357k/day. 
  • Upstream now reports that the new 10-year charter agreement will be US$299k/day.

How much will each rig cost to complete?

  • The rigs were previously contracted with the Singapore yards for an average price tag of US$800m each. The above four rigs are largely completed: Urca by 91%, Frade 70%, Arpoado by more than 90% and Guarapar by more than 80%.
  • Provisions were made in FY16 to the tune of S$230m and S$329m by Keppel Corp and Sembcorp Marine, respectively. Given the significant completion stage, we think total contract size to complete the two rigs will be in the region of US$200m. 
  • Note that the semi-subs that Sembcorp Marine recently sold were priced at US$500m while Keppel Corp’s LOI with Awilco was US$425m for a new unit. We project S$3bn of order wins each for Keppel Corp and Sembcorp Marine in 2018. We think the finalisation of the above contracts may take a while to conclude, depending on the financing structure.
  • Downside sector risks include delays in order wins and unsettled fines.

Highlighted companies 

Keppel Corporation 

  • ADD, Target Price S$10.00, based on SOP. 
  • We like Keppel Corp for its multiple catalysts :
    1. stronger O&M orders,
    2. sale of undelivered rigs, and
    3. redevelopment plans for Singapore properties. 
  • Key risks include overhang from more allegations of corruption.

Sembcorp Marine 

  • ADD, Target Price S$3.01 on 2.5x P/BV At the current price, it is trading at 1.7x CY18F P/BV, below its long-term average of 2.5x.
  • Catalysts include stronger-than-expected orders. 
  • Key risks include a negative outcome from the Petrobras corruption investigation.

LIM Siew Khee CIMB Research | CIMB Research Team CIMB Research | http://research.itradecimb.com/ 2018-03-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 10.000 Same 10.000
ADD Maintain ADD 3.010 Same 3.010