SEMBCORP INDUSTRIES LTD (SGX:U96)
SEMBCORP MARINE LTD (SGX:S51)
Shipyards – Singapore - Borr Needs A Faster Recovery To Pay Back On Time
- Borr has been the biggest acquirer of stranded jack-ups from Singapore shipyards, owing close to US$1.2b in delivery financing to the yards. An examination of its business strategy suggests that the current jack-up recovery is slower than it requires.
- Current dayrates remain too low for Borr to repay the yards within five years. Deployment has also been lacklustre. Receivable risks exist for the yards, which remain as trading plays.
- Our preferred pick is Sembcorp Industries (SGX:U96). Maintain MARKET WEIGHT.
WHAT’S NEW
Borr owes Singapore shipyards close to US$1.2b.
- It has been over a year since Borr Drilling (Borr) started acquiring rigs from Singapore shipyards for close to US$2.9b in total. The total amount due to the shipyards, which includes repayment of delivery financing, back-end financing fees and deferred payments, is approximately US$1.2b.
JU recovery not as fast as anticipated.
- Borr’s ability to repay the outstanding amounts due to Singapore shipyards hinges on the thesis that shallow water drilling activity will return very strongly, prompting rates to rise rapidly. While activity is picking up, data from IHS-Petrodata suggests that it might not be at the rate that Borr envisioned.
- Despite total utilisation rising from 57% in Dec 16 to 66% in Nov 18 (marketed utilisation is 76%), dayrates have risen at a far slower pace, from about US$50,000/day in Dec 16 to an average of US$45,000-83,000/day as of Nov 18 (depending on region, see table).
Current dayrates imply 10 years to recover financing principal.
- Assuming a dayrate of US$90,000/day, Borr is generating US$9m of free cash flow per working rig per year. This implies that Borr will take close to 10 years to recoup the principal outstanding (US$84m), double the five-year term that shipyards like Sembcorp Marine (SGX:S51) have extended for delivery financing.
- Based on our estimates, the rigs have to be put out to work at rates of US$120,000/day at the minimum to generate sufficient cash flow to repay its financing on time.
Only 3 out of 10 rigs delivered have gone to work.
- The longer-than-expected time frame would be of a lesser concern, if not for the fact that only three out of the 10 rigs that Borr has taken delivery thus far from the Singapore shipyards have been mobilised for work. The rest remain warm-stacked. Another nine will be delivered by end-20.
- While there is still time to play catch-up, the situation may become an issue over the longer term if activity does not pick up fast.
Worst case scenario sees 2016 redux.
- In the worst case scenario where dayrates and activity do not pick up as fast as expected, Borr will likely have to seek liquidity to finance the delivery payments as they come due, starting 2022. This will either have to come via additional debt financing or further issuance of shares. Given that share price has fallen substantially over the year, any further share issuances will likely be dilutive.
- Given the quantum due is over US$1b, it may be difficult to raise those monies, raising the spectre of balance sheet issues and stranded rig assets all over again for the yards.
ACTION
Borr’s acquisition was just the beginning.
- Singapore shipyards have managed to successfully offload their stranded rig assets, and recoup some of their capital. However, until Borr pays off the rigs in full, receivable risks remain.
The worst is over, but still far from a complete recovery.
- The shipyards remain at or below breakeven at the operating level. After accounting for net interest expense, they remain loss-making and are likely to be until their net debt falls significantly. With balance-sheet risks remaining on the cards, the yards are not completely out of the woods yet.
- Profitability remains distant, and the yards are still trading plays at best.
Maintain MARKET WEIGHT; SMM the most direct proxy to play the sector.
- Within our coverage, Sembcorp Marine (SGX:S51) is the most direct proxy to the recovery play. With the potential of breakeven at the operating level in 2019, and trading near -1SD to its long-term mean PB, current price levels look safe to catch the swings.
- Our preferred pick to play the sector remains Sembcorp Industries (SGX:U96), which has a stable utilities business, and exposure to Sembcorp Marine’s improving financials.
SECTOR CATALYSTS
- Higher-than-expected rise in E&P capex spending.
RISKS
- Oil prices (Brent) falling below US$50/bbl, triggering spending cuts.
- Receivables risk.
Foo Zhiwei
UOB Kay Hian Research
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https://research.uobkayhian.com/
2018-12-13
SGX Stock
Analyst Report
3.410
SAME
3.410
1.830
SAME
1.830
