(Overweight)
Singapore yards may get something out of the latest Petrobras tender. We have highlighted in our previous reports that Petrobras is a wildcard that the market has largely ignored given persistent disappointment in the timing of the contract award. Upstream reported today that Petrobras has opened the bids for the charter of 21 ultra-deepwater rigs and we are more confident that the full award will materialise this time. Last year, we were skeptical on the full award of all the 28 rigs given potential hurdle in financing the newbuilds. With the setup of Sete Brasil as a holding company for all the rig assets with the backing from pension funds, banks and Petrobras, we think chances are higher this time around that all the remaining 21 rigs will be awarded. We believe that Keppel and SMM could win up to six rigs each. A win from Petrobras will be a bigger boost to SMM’s order book and we believe share price could show greater reaction as well. We are Overweight on the offshore & marine sector.
Keppel, SMM and Odbrecht could win up to six newbuilds. Key takeaways from the latest Upstream report: (1) Petrobras has received offers for five rigs from Ocean Rig and 21 rigs from Sete Brasil. Ocean Rig is the lowest bidder with a day rate of US$584k. Sete Brasil is partnering several domestic and foreign players (see Figure 1) to own the rigs with day rates in the range of US$619k for the drillships and “slightly higher” for the semi-submersible rigs. (3) Shipyard construction costs are estimated at US$600-700m/rig. The first contract for seven drillships awarded to EAS was priced at US$662m/rig. We believe the shipyard contracts will come in at the top end of the estimated range. Key risks in running a shipyard in Brazil are execution risk (potential delays) and cost control (shortage of skilled workers and wage inflation).
Impact: More significant for SMM. With the Brazilian-built ultra deepwater rigs costing US$600m-700m/rig, Keppel and SMM could win up to US$4.2b (S$5.4b) each. Currently, Keppel and SMM has outstanding order book of S$10.2b and S$5.8b respectively. A win in Brazil will be more significant to SMM’s order book and we believe its share price could react better than Keppel. Wining an order could also allow Sembcorp to establish a presence in Brazil. Valuations in the sector are attractive: stocks are now trading at 9-10x forward P/E vs. trough of 4-5x during the global financial crisis and 22-30x during the peak.
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