Oil And Gas Sector - OCBC Investment 2018-03-05: Sete Brasil To Honour Four Rigs

Oil & Gas Sector Petrobras Sete Brasil SEMBCORP INDUSTRIES LTD U96.SI SEMBCORP MARINE LTD S51.SI KEPPEL CORPORATION LIMITED BN4.SI

Oil And Gas Sector - Sete Brasil To Honour Four Rigs

According to Upstream, Petrobras and Sete Brasil have reached a key agreement that call for the construction and delivery of four drilling units.

Sete Brasil, which has been operating under bankruptcy protection since Apr 2016, will keep the charter referring to four drilling rigs, while terminating the contracts for another 24 units.
Recall that Sete Brasil initially ordered the construction of 29 rigs (one on speculation) with five shipyards including two belonging to Keppel Corp (KEP) and Sembcorp Marine (SMM). Construction of the rigs was suspended in 2015 after Sete Brasil ceased payments due to financial difficulties, and problems were exacerbated following bribery allegations.
It was not disclosed which four rigs will remain with contracts, but it is likely that they would be rigs in a more advanced stage of completion at yards that are more established. As such, we believe that the likely candidates are two units by Keppel Corp and Sembcorp Marine.

Keppel Corp and Sembcorp Marine have maintained that earlier provisions made for the Sete Brasil contracts have been sufficient, based on their last updates with available information as of then.
To recap,
- the completion status for Keppel Corp’s rigs are 92% for the 1st unit, 70% for the 2nd, 40% for the 3rd, 21% for the 4th, below 10% for the 5th and 6th.
- For Sembcorp Marine’s rigs, the 1st is about 90% completed, 80% for the 2nd, 60% for the 3rd, 40% for the 4th, and lower for the rest.
As more details regarding the four rigs are disclosed by Sete Brasil, we will look out for whether
1. the four rigs are indeed Keppel Corp’s and Sembcorp Marine’s,
2. if there are any adjustments to the original contract prices (US$800m+/rig on average) considering that dayrates for rigs are lower now, and
3. if there is any compensation for the termination of the remaining rigs.
Whether additional provisions have to be made or allowances can be reversed depends on the answers to these questions as well as the assumptions that Keppel Corp and Sembcorp Marine made when they made their provisions, which we are not privy to.

That aside, sentiment in the overall industry has been improving, and we see this recent development as another sign that companies are willing to restart their capex programmes. However, as mentioned in our earlier reports, the recovery is still a gradual one, and a sustained flow of new orders is required for a rerating of stocks in the sector.
Keppel Corporation [BUY; FV: S$9.45] is still our preferred pick, which will benefit from an industry recovery while having other segments such as property and infrastructure to support earnings.

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-03-05

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