Rig builders in for a rough patch in 2015, says Maybank Kim Eng

SINGAPORE (Nov 20): Keppel Corp and Sembcorp Marine are unlikely to secure the $9 billion to $11 billion worth of new orders in 2015 expected by investors as oil prices continue to fall, says Maybank Kim Eng.

In a sign on waning demand, recent day rates for deepwater rigs are being renewed at 25% to 40% below the levels in their last contracts, while 86% of the new supply of jack-up rigs have yet to be deployed, according to Maybank Kim Eng Yeak Chee Keong.

" As a result, we expect drillers to defer their new rig orders in 2015," he said in a sector report today.

When concerns about an oversupply of deepwater rigs and international oil companies cutting their capital spending first surfaced at the start of the year, drilling companies believed that sustained high oil prices would " return the market to an equilibrium" within 12 to 18 months, he noted.

Now, however, lower oil prices have foiled hopes for a recovery in 2015, with offshore drillers appearing to be heading into " a perfect storm" of low oil prices, an oversupply of rigs and capital expenditure cuts by oil companies," he said.

" A recovery could now be pushed back to 2016."

Longer term, while the outlook may be positive, drillers are in no hurry to order new rigs, he said.

" This will be negative for Singapore rig builders. With net order books of almost $13 billion each, Keppel and SembMarine may have sufficient orders to last 1.5 to two years.

" But their backlog momentum is ultimately their stock-price drivers. Their stocks are likely to languish on any order misses in 2015. Apart from new-order risks, existing orders with options may lapse or be re-negotiated at lower prices."

Against this backdrop, Maybank Kim Eng has downgraded Sembcorp Marine to " sell" from " hold" and cut its price target from $3.80 to $2.65.

Accordingly, it has downgraded Sembcorp Industries to " sell" from " hold" and lowered its price target to $4 from $4.75.

It has cut its price target for Keppel Corp to $9 from $10.74 but kept its " hold" rating.

" Keppel may have the potential to surprise with better execution and margins, but any such strength is unlikely to swing sentiment much," said Yeak.

At 9:40am (0140 GMT), Keppel shares fell 0.5% to $9.22, SembMarine was flat at $3.36 and Sembcorp Industries was unchanged at $4.64.