Offshore sector hotting up

Kim Eng on 26 Jan 2012

What a difference a week makes. Last week, we reported on M&A speculation driving the positive price action of Offshore & Marine stocks. Within the week, these stocks have taken a more fundamental tack, with market optimism for a resumption of rig orders driving up share prices sharply. The major blue-chip outperformer has been Sembcorp Marine (SMM), whose price rose by 24% over the past month. Recently, Upstream reported that SMM had secured a drillship order from Sete Brasil. Previously, we noted that Sete was poised to become a major factor in the handling of contracts for Petrobras. To recap, Sete Brasil was established in May 2011 with the mandate to build deep-water rigs for Petrobras' offshore exploration requirements. Its main stakeholders are Brazilian banks and pension funds, which also allows it to access financing. Petrobras itself has less than a 10% stake. Sete in one fell swoop takes the financial burden off Petrobras, as well as provides political cover. Keppel Corp was the first beneficiary of Sete’s mandate, with the clinching of a US$809m semisubmersible newbuild contract in December. Back then, we pointed out that this was indicative of more to come for the Singapore yards. While yet to be officially confirmed by SMM, we estimate the drillship order could be worth US$650-700m to SMM. Upstream also reported that Sete is on the cusp of awarding a slew of new contracts, and that Petrobras may be looking for up to 36 new rigs – the value of these alone could be collectively worth more than US$25bn. The future is looking rosy indeed. Separately, Cosco Corp has also advanced steadily on market speculation that it may secure new offshore orders as well. We, however, are less sanguine. The first line of new orders is likely to go to established offshore yards such as Keppel and SMM. Furthermore, any jobs that Cosco take on will continue to come at the expense of margins, due to learning curve issues. In summary - stick to the experts. Keppel has been a relative laggard to SMM, and is our top pick. 

Keppel Corp (KEP SP, $10.61)
Key levels Resistance 2: $11.35 Resistance 1: $11.00 Support 1: $10.00 Support 2: $9.55
Keppel Corp is now overextended and a short pullback would be healthy. The counter remains technically sound holding above the 100- and 200-day EMA, suggesting the bulls are in control. The immediate support level of around $10.00 should attract buyers in the event of a pullback.

SembCorp Marine (SMM SP, $4.78)
Key levels Resistance 2: $5.15 Resistance 1: $4.75 Support 1: $4.50 Support 2: $4.00/10

The counter has moved up aggressively over the past few weeks. Technical indicators are extremely overbought and the counter may need some time to rest before another sustainable breakup. The support area at around $4.50 would be able to hold on any weakness.