Singapore Rig Builders - DBS Research 2018-03-06: Glimmer Of Hope For Rig Market

SEMBCORP MARINE LTD S51.SI KEPPEL CORPORATION LIMITED BN4.SI

Singapore Rig Builders - Glimmer Of Hope For Rig Market

Petrobras and Sete Brasil close to settlement.
Keppel-Awilco could potentially ink first newbuild rig contract in 2.5 years, worth up to S$2.3bn.
Borr consolidating the fragmented jackup market.
Reiterate BUY on Sembcorp Marine, Keppel Corp.

Keppel Corp and Sembcorp Marine (SMM) have given back their gains since the year started, alongside weaknesses in broad market and oil price as well as earnings disappointment. This presents a good entry point to position for strong contract flow ahead. We reiterate our stance that earnings are lagging indicators and contract wins are key catalysts during recovery.
We believe healthy oil price above US$60 per barrel bodes well for project Final Investment Decision (FIDs), leading to crytallisation of orders for production related platforms (read also : Sembcorp Marine - Energean FPSO contract in the bag?).
Sembcorp Marine remains our top pick to ride O&G recovery with its strong visible order pipeline while Keppel is a safer bet backed by its multi-pronged business strategy.

On 1 Mar, Upstream reported that Petrobras and Sete Brasil (Sete) have reached an agreement on the construction and delivery of four drilling rigs while terminating contracts for another 24 rigs. While the units to be delivered were not disclosed, they are believed to be the ones near completion, likely to be the first two rigs each from Keppel Corp and Sembcorp Marine.
Sete originally ordered the construction of 29 rigs in 2013 – one on speculation with five Brazilian shipyards. Of which, Keppel secured six semi-submersible rig contracts (US$6.2bn in total) while Sembcorp Marine won seven drillships (US$7bn in total).
Each of the four rigs will be chartered for a 10-year period at a day rate of US$299,000, which is a 13-16% discount from initial indicative day rates of between US$344,000 and US$357,000.

Keppel and Sembcorp Marine collected substantial payments of c.S$4.4bn collectively and made provisions of c.S$640m to account for the shortfall i.e. receivables owed to the yards. We believe some compensation should be made to shipyards as an incentive to deliver the units. In addition, additional investments of ~S$300-400m will be required to complete the units.
Actual financial impact is dependent on
1. rig price and payment agreed to complete those units;
2. any compensation on the receivables payable to shipyards; and
3. plans on the other four half-built units.
In the broader scheme of things, we see the Petrobras-Sete rig deal as another positive indicator of demand recovery.

Borr Drilling Limited (Borr), founded in Aug 2016 by John Fredriksen’s ex-associate Tor Olav Troim and listed on Oslo at end-Aug 2017, has built up a fleet of 26 premium jack-ups at an average acquisition price of US$120m/rig, in three rig deals involving Transocean, bankrupt Hercules Offshore, and Sembcorp Marine.

On 22 Feb, Borr Drilling announced a takeover offer to buy out Paragon Offshore for US$232.5m. The acquisition will add 10 jackups (the other 21 older jackups are likely to be scrapped) and 1 semi-submersible to Borr’s existing fleet of 26 premium jackups.

Keppel has confirmed the Business Times article in Jan-2018 in relation to a possible sale of six jackup rigs to Borr Drilling. The discussions are ongoing and terms have yet to be finalised.
Assuming the total transaction value of US$960m reported in the article is true, it implies a price tag of US$160m per rig. This represents approx. 25% discount to original contract value of c.US$215m. This is very positive news as it removes a key overhang of undelivered rigs. We believe eight out of 17 undelivered jackup rigs are at higher risk of seeing cancellations.

The acceleration of scrappage, coupled with improving rig demand is expected to lift the utilisation and day rates of rigs towards 2019, driving demand for newbuild rigs.

On 28 Feb, Keppel announced that it has signed a LOI with Awilco Drilling PLC (Awilco) to build a harsh environment semisubmersible with options to build up to a further three units. Based on Awilco’s announcement, the rig is valued at US$425m each (approx S$560m).
The contract is pending finalisation of terms and downpayment, but should be firmed up pretty soon given the planned delivery in 2021. Awilco has also proceeded to propose an equity raising exercise of US$65m through private placement to partial fund the payment for the newbuild contract. The payment term will likely be back-loaded in the ratio 10:10:80.
Contract value appears to be lower than usual price tag of US$500m and above for harsh environment semisubmersible rigs, as these are for mid-water segment which require lower specification than deepwater units. While margins might not be lucrative given the keener competition, raising the yard activity level and orderbook visibility are critical to maximise efficiency and profitability of the shipyards.
Nevertheless, this is very positive news for Keppel Corp, marking a good start to the year. If Awilco exercises the options, the total contract value could go up to US$1.7bn (c. S$2.3bn).
We have assumed S$3bn contract wins for Keppel Corp in 2018.

We do not expect newbuild rig demand to make a big comeback so soon as the market will need to see an acceleration in old rig scrapping and further improvement in rig chartering activity. However, we do see signs of revived interests on newbuild rigs.
The bright spots are harsh environment drilling rigs especially for the mid-water segment, as supply is relatively scarce. In addition, there is an advantage of newbuild rigs - the flexibility to customise specifications for more cost saving solutions given the moderate oil price environment and the tendency of over-specifications for rigs that were ordered during the boom.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-03-06

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