Offshore and Marine Sector

DMG & Partners Research on 12 March 2012

THE offshore & marine (O&M) sector has performed well since the start of the year with share prices up 15-36 per cent year-to-date. PE valuations have expanded 40-70 per cent from its low in 2011, but current valuations at 13-17 times are well below peak of 25-30 times seen in the last upcycle.

We see reasons to remain bullish: 1) Underlying market drivers remain positive: world oil demand is growing, oil prices remain above US$100 per barrel and E&P (exploration and production) spending outlook is bullish; 2) Rising charter rates and attractive payback period are likely to draw renewed interest for newbuild drilling rigs; and 3) Petrobras offers more opportunities than just the deepwater rig projects.

In our view, Keppel O&M and Sembcorp Marine (SMM) are well positioned for more big-ticket wins. Maintain 'overweight' on the sector with Keppel Corp as our top pick. Most of the oil majors and national oil companies have declared higher capital expenditure (capex) in 2012. On aggregate, we estimate capex spending to be higher by 6-10 per cent y-o-y. Singapore yards have turned more positive: enquiries for newbuild rigs are much higher now compared to three months ago. We believe this will lead to more offshore orders.

Day rates for semi-submersible rigs and high-specs jack-up rigs have increased by 20-30 per cent in the past 12 months while utilisation rates for newer rigs are hovering around 90-100 per cent. As payback period for newbuild rigs remains attractive between 5.7 and 7.5 years, we believe rig owners will come back to the yards sooner rather than later.

We are switching our top pick to Keppel Corp. We reiterate our preference for big-cap O&M stocks given their direct exposure to the Petrobras-related jobs. Since the start of the year, our top pick, SMM, has risen 36 per cent year-to-date. We now have Keppel Corp as our top pick simply due to a higher upside and it being a laggard to SMM.

We would avoid Chinese shipbuilders as poor outlook for commercial shipbuilding and depressed margins on new contracts could hit FY13-14 forecast earnings. Key risks to our recommendation are: 1) a severe debt crisis; and 2) steep decline in crude oil prices.
Sector - OVERWEIGHT

Sembcorp Marine

OCBC on 24 Feb 2012

Sembcorp Marine (SMM) reported a 1.5% YoY rise in revenue to S$997.6m and a 4.3% fall in net profit to S$229m in 4Q11 such that FY11 net profit was 8% higher than our expectations. This was mainly due to foreign exchange gains and substantially lower general and administrative expenses in 4Q11. Besides lower margins going forward, we also note that there are hardly any major catalysts left in the medium term after Petrobras awards its drillships orders. We have tweaked our estimates to take into account our higher new order wins assumption and updated the market value of SMM’s stake in Cosco Corp. As such, our fair value estimate rises from S$5.63 to S$5.70. SMM’s stock price has rallied about 37% YTD vs the STI’s 12% rise and the FTSE Oil and Gas index’s 24% gain. As we now see limited upside potential in the stock price, we downgrade SMM to HOLD.

FY11 net profit slightly above expectations
Sembcorp Marine (SMM) reported a 1.5% YoY rise in revenue to S$997.6m and a 4.3% fall in net profit to S$229m in 4Q11, bringing full year revenue and net profit to S$3.96b and S$751.9m, respectively. FY11 net profit was 8% higher than our expectations, and this was mainly due to foreign exchange gains of S$10.4m in 4Q11 and substantially lower general and administrative expenses (S$34.2m, 50.4% lower YoY) with lower bonus provisions compared to 4Q10.

Expecting lower margins going forward
Management has guided operating margins of 15% or lower for FY12, vs FY11’s 18.6% and FY10’s 20.7%. Margins may also be lower in FY13 when the new Brazilian yard comes into operation as there could be initial teething problems, and it also pays to be prudent to assume conservative margins for SMM’s first drillship in Brazil.

Hardly any major catalysts left after Petrobras
There has been ample coverage on Petrobras’ rig orders and it is quite likely that the market has priced in these expectations in SMM’s stock price by now. We have also highlighted the possibility of new semi-submersible rig orders in our earlier reports with the tightening of the deepwater market. However, these have been reflected in our new order wins estimate of S$8.7b. Hence though there could be a positive knee-jerk reaction in the stock price when the Petrobras orders are awarded, we do not see any other major re-rating catalysts in the near term.

Limited upside; downgrade to HOLD 
We have tweaked our estimates to take into account our higher new order wins assumption and updated the market value of SMM’s stake in Cosco Corp. As such, our fair value estimate rises from S$5.63 to S$5.70. SMM’s stock price has rallied about 37% YTD vs the STI’s 12% rise and the FTSE Oil and Gas index’s 24% gain. As we now see limited upside potential in the stock price, we downgrade SMM to HOLD. 

Sembcorp Marine

Kim Eng on 17 Feb 2012


Sembcorp Marine (SMM SP) – Secures new jack-up contract for US$213m
Previous day closing price: $5.28
Recommendation – Buy (maintained)
Target price – $5.58 (maintained)


Sembcorp Marine (SMM) has announced a new order worth US$213m. It will construct a Pacific Class 400 jack-up rig for customer Safin Gulf. The rig is due for delivery in November, which is a relatively short time of less than a year, whereas a jack-up built from scratch takes around two years. We suspect that the rig may have been pre-built by SMM, hence the faster lead time and a significant premium pricing. Previously, the same class of rig sold for US$192m.


We will get further updates from the company. As it stands, the contract win itself is positive for SMM, and the news should propel its share price even higher. We maintain our Buy recommendation and target price of $5.58.

Sembcorp Marine

Kim Eng on 7 Feb 2012


Confirms first drillship order of US$793m. Sembcorp Marine (SMM) has announced that its Brazilian shipyard has secured a contract worth approximately US$792.5m from Séte Brasil for the design and construction of a drillship. The announcement confirms what industry newspapers have been reporting in the past two weeks. SMM’s share price has rallied in anticipation of the confirmation and with more positive news likely to come, we raise our target price to $5.58/share. Maintain Buy.

Made in Brazil. The drillship is scheduled for delivery by 2Q15, and will be built in tandem with the development of SMM’s US$550m Estaleiro Jurong Aracruz. The relatively high pricing compared with previous international drillship orders at around US$600m reflects both the higher specifications of this unit, as well as the buffer it will offer against higher construction costs in Brazil to satisfy local content requirements.

FY11 results due on 23 February. SMM will announce its FY11 earnings on 23 February 2012. We expect the group to cap off the year with another solid quarter on execution of its ongoing orderbook, and EBIT margins to be maintained at a healthy 17-18%. Our FY11 net profit forecast stands at $733.7m, which is ahead of consensus estimate of $711m. For FY12, we expect to see sustained contributions from orders secured in FY10 and FY11. However, margins may see a decline due to the transition to lower-priced contracts.

Outlook improved. Given that the bulk of the earnings from the drillship contract will materialise only in FY14 and FY15, there is little change to our near-term forecasts. SMM’s order backlog currently stands at around US$5.1b and we estimate another US$4b worth of new orders to be secured for FY12 (excluding Petrobras). As we are still confident that Singapore’s rig builders will be beneficiaries of Petrobras’s capex, we ascribe a higher 15x multiple to SMM’s FY12 earnings to factor in its improved prospects. Our new SOTP-derived target price is $5.58 ($4.95 previously). Maintain Buy.

Rig Builders

OCBC on 6 Feb 2012


US President Obama recently declared that he would be directing his administration to open more than 75% of the potential offshore oil and gas resources in the US. US oil and gas drillers have generally outperformed the market in the first year of every 5-year OCS leasing program and during Election years; 2012 will be coincidentally be both. Suppose history repeats itself, Keppel Corporation (KEP) and Sembcorp Marine (SMM) could benefit from the high correlation of their stock prices with that of US drillers. Maintain BUY on both stocks with fair value estimates of S$12.27 and S$5.63 for KEP and SMM, respectively.

More than 75% of resources on US OCS to be made available. 
In his recent State of the Union Address, US President Obama declared that he would be directing his administration to open more than 75% of the potential offshore oil and gas resources in the US. What he is likely referring to are the lease sales under the 2012-2017 Outer Continental Shelf (OCS) oil and natural gas leasing program.

1st year of 5-year leasing program, and an Election year. 
We notice that 2012 will be the first year of the upcoming five-year OCS leasing program. Coincidentally, the US Elections will also be held this year. We track the stock price performance of the Dow Jones Industrial Average and a basket of US oil and gas drillers since 1992, and find that the latter has outperformed the former in all of the past four 1st-year leases each year. This is also the case for US Election years except for 2008.

Good returns from a happy coincidence? 
Looking at history and supposing that oil prices remain firm (barring a disorderly debt default in the Eurozone), 2012 could be another year in which US oil and gas drillers outperform the broader market. These companies are important customers of Singapore’s rig builders, Keppel Corporation (KEP) and Sembcorp Marine (SMM), and their stock prices have been highly correlated in the past decade.

Orders expected not just from the US.
Meanwhile, both rig builders are also expected to secure orders from companies outside the US, such as PEMEX and Statoil. As mentioned in our earlier report (16 Jan 2012), SMM is likely to outperform KEP during a period of bullishness on oil and gas plays. The former has risen 27.0% YTD vs the latter’s 13.7 % gain and the STI’s 10.3% appreciation. However, we still see upside potential for both stocks. Maintain BUY on KEP [FV: S$12.27] and SMM [FV: S$5.63].

SembMar

Kim Eng on 6 Feb 2012


Sembcorp Marine (SMM SP) – Announces much-anticipated US$793m drillship contract
Previous day closing price: $4.85
Recommendation – Under Review
Target price – $4.95 (Under Review)


Sembcorp Marine (SMM) has announced that its Brazilian shipyard has secured a contract worth approximately US$792.5m from a subsidiary of Sete Brasil for the design and construction of a drillship. The contract had been reported by several industry newspapers in the past two weeks, and this announcement is the confirmation of this. The delivery is scheduled for no later than 2Q15. The ultra-deepwater drillship will be among a series of drillships to be built in Brazil to cater to the recent oil and gas discoveries in the offshore giant pre-salt fields.


We have previously indicated that Sete was poised to become a major factor in the handling of contracts for Petrobras. To recap, Sete Brasil was established in May last year with the mandate to build deepwater rigs for Petrobras’s offshore exploration requirements. Its main stakeholders are Brazilian banks and pension funds, which also allows it to access financing. Petrobras itself has a less than 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. We pointed out that this was indicative of more to come for the Singapore yards. With Sete reportedly 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$25b. We therefore fully expect both Keppel and SMM to be huge beneficiaries of this development, hence our Buy calls on both counters. However, the timing of future contract awards remains uncertain. Keppel has been the laggard in the current rally on the rig builders.


Technical specifications of the drillship: According to SMM, the Jurong Espadon drillship represents the next generation of high-specification drillships with advanced capabilities for operational efficiency and ultra-deepwater operations worldwide. The drillship will be equipped with state-of-the-art drilling facilities, a larger deck area with a 40m-wide main deck, efficient deck arrangement and a large moon pool for enhanced drilling operations as well as DP-3 (Dynamic Positioning class 3) capabilities, superior motion features and Azimuth thrusters for improved operability. It is capable of operating at a water depth of 10,000ft and drilling to depths of 40,000ft, with accommodation facilities for a crew of 180 personnel.

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. 

Sembmar

OCBC Research on 16 Jan

With the positive sentiment on oil and gas stocks recently, Sembcorp Marine (SMM) has been a key beneficiary, rising by about 17.8% YTD compared to the FTSE Oil and Gas index’s 8.3% and the STI’s 5.5% gain. And during a period of bullishness on the sector, we further expect the stock to outperform its closest peer, Keppel Corporation. Meanwhile, we are also optimistic about SMM’s new order pipeline across a range of assets; the group is tendering for various work which may include construction of the world’s largest jack-up. Maintain BUY with S$5.63 fair value estimate.

Key beneficiary from positive sentiment. With the positive sentiment on oil and gas stocks recently, Sembcorp Marine (SMM) has been a key beneficiary, rising by about 17.8% YTD compared to the FTSE Oil and Gas index’s 8.3% and the STI’s 5.5% gain. During a period of bullishness on oil and gas plays, SMM’s stock is likely to outperform its closest peer, Keppel Corporation (KEP) as 1) SMM only has offshore marine operations while KEP also has property and infrastructure arms, and 2) SMM is likely to be able to take in more rig orders for earlier delivery compared to KEP due to higher yard capacity – recall KEP secured new orders totaling S$10b with deliveries extending to 2015 last year while SMM clinched work worth about S$4b last year.

Tendering for new orders – may build largest jack-up yet? According to Upstream , Jurong Shipyard is one of three bidders who submitted offers early this year to Petrobras for the conversion of four FPSO units which will be used in the Santos basin in Brazil. Jurong is also one of four yards expected to tender for the construction of up to four super-sized jack-ups for Statoil in May . Coined as Category J rigs, they will be used for development drilling in the North Sea. According to market talk, the Gusto MSC CJ80 is likely to be the rig design – recall that the CJ70 is the largest jack-up built to date. Sembcorp Marine secured a CJ70 jack-up rig order from Seadrill in Mar last year for US$450m while Keppel Corp won an order for two similar units from Maersk in Feb last year for US$1b, giving a rough idea of the quantum of the Cat-J programme.

Optimistic about order pipeline. Our new order win assumption for SMM this year is S$4b (excluding Petrobras rig orders), and we are optimistic on the orderflow across a range of assets (jack-ups, semi-subs and production platforms; drillships to depend on Petrobras). Maintain BUY with S$5.63 fair value estimate. 

SembMar

DMG & PARTNERS RESEARCH on Jan 9

WE hosted Sembcorp Marine's chief financial officer (CFO) Tan Cheng Tat and senior vice-president (SVP) for investor relations and communications Judy Han for the OSKDMG Asean Corporate Day in Singapore.

Management was particularly upbeat on new order prospects, and believes SMM will see higher fresh order wins in 2012. SMM also discussed its commitment to build a strong presence in Brazil and is confident about winning a fair amount of work from Petrobras. Maintain 'buy' with an unchanged sum-of-the-parts-derived TP of $5.25.


Key discussions: The discussions with investors touched on order outlook (particularly from Petrobras), status of jackup options, margins on new rig projects, potential of new products and capacity expansion in Singapore and Brazil.


Contrary to news reports, Petrobras has not cancelled the tender for the 21 rigs to be built in Brazil. Petrobras has entered into direct negotiations with the Sete Brasil and Ocean Rig to get better terms on the rigs.
Given its strong commitment to build a presence in Brazil with its US$550 million new integrated yard in the state of Espirito Santo, management is confident about getting a fair share of new jobs from Petrobras. SMM is bidding for six drillships under Sete Brasil.


High enquiries from established operators: SMM is experiencing strong order enquiries for newbuild jackup rigs, semisubmersible rigs and conversion work. Management is confident of winning more than $5 billion new orders in 2012 ($3.7 billion in 2011), ahead of our forecast of $4.5 billion.


Atwood has not announced its intention to take up the two jackup options which expired on Dec 31, 2011. According to management, other buyers are lining up to take the jackup slots with higher prices. The other six jackup options (Noble and Seadrill) are intact until 2H 2012.


Valuation: Maintain 'buy' with TP of $5.25. We value the stock using:15 times core shipyard earnings, adjust for FY2011 estimated net cash,30 per cent stake in Cosco Shipyard Group at 8x P/E and Cosco Corp at 85 cents.
BUY

Telcos top picks in two outlook reports as volatility persists

From Businesstimes on 9 Jan 2012

Telcos top picks in two outlook reports as volatility persists

M1, SingTel, DBS, Frasers Centrepoint Trust have emerged as key 'buy' calls

WITH global uncertainties carrying over from 2011 into the new year, telecommunications stocks have once again come up as top picks in two market outlook and strategy reports.

M1, SingTel, DBS, and Frasers Centrepoint Trust, in particular, have emerged as key 'buy' calls from both UOB Kay Hian Research and OCBC Bank's Wealth Panel, in separate reports released on Friday.

Forecasting a 2012 Straits Times Index (STI) price to earnings (PE) ratio of 12.1x, UOB Kay Hian said the index's valuation is 'undemanding' - at a 26 per cent discount to its long-term PE mean of 16.3x (since 1993).
'Nevertheless, we think the discount may remain elevated in the near term, given the uncertain prospects for 2012 corporate earnings and lingering concerns over the euro debt crisis,' said UOB Kay Hian.

The research house said investors should opt for a balance of sustainable high-yield stocks, selective retail Reits, and 'undervalued laggards with specific stock catalysts'.

Apart from the telcos, UOB Kay Hian's key 'buys' included CapitaLand and Ezion, while City Developments and NOL sat in its key 'sells' list. It also recently upgraded Wing Tai and Ho Bee to 'buys' due to their deep value after sharp share price corrections in December last year.

Meanwhile, OCBC Investment Research head Carmen Lee warned that even though share prices appear to have discounted weaker earnings expectations, 'they may not have been fully priced in the worst case scenario'.
Said Ms Lee: 'If the outlook deteriorates significantly, earnings estimates will need to be shaved further.'

With volatility persisting and investor confidence remaining fragile, the OCBC Wealth Panel said that it prefers quality and safer assets, and high dividend yielding defensive stocks.

Telecommunications aside, the OCBC team said that they continue to favour the healthcare and oil and gas sectors in 2012. Its picks for the year include Raffles Medical, Keppel Corp, Sembcorp Marine, Biosensors, and Golden Agri-Resources.

SembMar

OCBC Research
Sembcorp Marine: Ground-breaking at new yard in Brazil

Summary: Sembcorp Marine (SMM) has announced the ground-breaking of Estaleiro Jurong Aracruz to mark the commencement of the yard’s construction works. This new yard is close to the rich oil and gas basin of Espirito Santo, one of Brazil’s giant pre-salt reservoirs. Recall that the freehold site was acquired in 2010; with this ground-breaking event, we think that the award of Petrobras’ rig tender should be finalised soon, probably by 1Q12. Although full completion of the yard is scheduled for end 2014, it will be developed in stages and we think certain offshore work could be done in tandem with yard construction. Preliminary projection of the development costs is estimated to be around US$550m, and will be funded with debt and internal funds generated from operations of existing yards. Meanwhile, SMM also announced yesterday that Sembawang Shipyard has won a US$140m contract from Equinox Offshore Accommodation to convert a ropax vessel to a DP2 accommodation and repair vessel. Maintain BUY with S$5.63 fair value estimate.

Keppel & SembMar

OCBC Research, Thu, 8 Dec 2011,

The FTSE Oil and Gas index has been outperforming the broader market till the global sell-down in Aug, during which this higher-beta sector suffered under the prospect of a poorer-than-expected global economic outlook. However, the spread has narrowed in the past two months with increasing market realisation that offshore activities remain robust as the favourable oil price environment is conducive for capital expenditure. Stepping into 2012, we expect the local rigbuilders to continue securing orders, albeit at a slower pace. The offshore support vessel sub-sector should also see a continued recovery as the oversupply situation for certain segments runs its course. Meanwhile, tendering activity in the subsea sub-sector is firm. Maintain OVERWEIGHT as the offshore sector has strong long-term fundamentals; countries also have an interest in fulfilling as much domestic oil demand as possible to boost energy security. We prefer Keppel Corporation [BUY, FV:S$12.02] and Sembcorp Marine [BUY, FV:S$5.63], while Ezion Holdings [BUY, FV:S$0.97] is an attractive small-mid cap play.

A tale of two halves… almost. The FTSE Oil and Gas index broadly tracked the STI till early Mar then divergence emerged when the oil and gas index outperformed the broader market. The outperformance continued till the global sell-down in Aug which was led by the historical downgrade of the US government credit rating by S&P, as well as concerns over the Eurozone’s debt situation. The higher beta oil and gas stocks suffered under the prospect of a poorer-than-expected outlook for the global economy, but the spread between the FTSE Oil and Gas index and the STI has narrowed in the past two months with increasing market realisation that offshore activities remain robust as the favourable oil price environment is conducive for capital expenditure in the sector.

Stick with a bottom-up approach. A focused stock-picking strategy would have fared relatively well in 2011, and we would stick to a similar style in 2012, overweighting companies that are operating in sub-sectors with more favourable demand-supply dynamics, have strong balance sheets and order books to weather a downturn. We see credit tightening as a key risk for the sector, given the capital intensive nature of the business. Stepping into 2012, we expect the local rigbuilders to continue securing orders, albeit at a slower pace compared to 2011’s newbuild rush. This excludes Petrobras’ orders, which may be awarded by 1Q12. The offshore support vessel sub-sector should also see continued recovery as the oversupply situation for certain vessel segments runs its course, resulting in more favourable utilisation and day rates. Meanwhile, tendering activity in the subsea sub-sector is firm, though benefits to contractors in terms of earnings contribution may not be felt in the near term.

Strong long-term fundamentals; energy security is the key. We believe that the offshore sector has strong long-term fundamentals as countries have an interest in fulfilling as much domestic oil demand as possible, in order to boost energy security. In Asia, this does not just apply to China and India, but also to places such as Malaysia and Indonesia which face production declines if they do not increase investments in this industry. Going into 2012, we remain OVERWEIGHT on the oil and gas sector, preferring Keppel Corporation [BUY, FV: S$12.02] and Sembcorp Marine [BUY, FV: S$5.63]. Ezion Holdings [BUY, FV: S$0.97] is an attractive small-mid cap play.