Published November 29, 2008

Rig builders' shares dive

Keppel's $1.2b of contract reviews spark rush of analyst downgrades in industry

By CHEW XIANG
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SHARES in Keppel Corp, Sembcorp Industries and Sembcorp Marine plummeted yesterday on news from Keppel that some customers are reviewing their options for contract orders worth $1.2 billion placed with its offshore and marine arm. The fall in share prices also came as analysts rushed to downgrade stocks in the industry.

OCBC analyst Kelly Chia, who downgraded Keppel to 'hold' and has a $4.80 target price on the stock, said: 'There is also the concern that this might spark a cascade of cancellations in the industry.'

Yesterday, Keppel closed 60 cents or 12.5 per cent down at $4.20. The stock has more than halved in value since September and yesterday was downgraded by three research houses - Goldman Sachs, CIMB and OCBC.

The contracts under review, signed a few months ago, involve a semi-submersible for Scorpion Offshore, two jack-up rigs for Seadrill and a multi-functional support vessel for Ezra Holdings' Lewek Shipping. Non-refundable deposits of between 5 per cent and 20 per cent have been placed but work has not started on the projects.

In separate disclosures, Scorpion said that it had not been able to secure necessary funding, while Ezra said that it has had to review its capital expenditure given the uncertain financial environment.

Goldman Sachs analysts David Ng and Dai Xiaoxiang, who put a 'sell' call on Keppel, said that the review 'has surprised us such that it has not only established that oil services companies are backing out, it is hitting incumbents such as Keppel, which in our view, shows the speed at which overall industry sentiment is deteriorating'.

CIMB analyst Lim Siew Khee said: 'We believe that the remaining $5.4 billion orders secured (in the year to date) could be at risk and could be subject to review in 2009 if work has not begun and weak market conditions persist.'

Both the stocks of Sembcorp Industries and Sembcorp Marine, its offshore arm, fell more than 9 per cent yesterday as investors saw the development at Keppel as negative for the industry. Sembcorp closed at $2.20, down 22 cents or 9.1 per cent, while SembMarine fell 17 cents to close at $1.60.

Goldman Sachs, which also downgraded SembMarine to 'sell', said: 'We believe there could be further downside as more new capacity enters the market and squeezes revenues further over the next 12 to 24 months.'

The analysts noted that there have been increasing signs of industry spending cuts and demand stress.

Mr Lim, who maintained an 'outperform' on SembMarine, said that its order book could be shielded by national oil companies. 'While we believe it is also in talks with Seadrill on two jack-rigs awarded during the year (for potential deferment or cancellation), we see limited cancellation risks for the remaining three jack-up rigs as its customers are national oil companies or companies operating in the Middle East where there is still a severe shortage of jack-up rigs,' he said.