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Singapore rigbuilders: Demand for deepwater oil rigs to stay buoyant for Keppel and SembMarine
Shares of rigbuilder Keppel Corp and Sembcorp Industries — as well as its rig-building arm Sembcorp Marine (SembMarine) — have been on a tear following news that the yards had finally clinched record deals to make several deepwater drilling rigs for Petrobras, the national oil company of Brazil.
On Aug 8, SembMarine announced that it had secured contracts from the Brazilians to design and build five ultradeepwater drillships capable of operating in water depths of 10,000ft and drilling to depths of 40,000ft for US$4.8 billion ($6 billion). That takes SembMarine’s drillship order count from Petrobras to six, including a contract clinched in February. The drillships will be delivered between 2Q2015 and 2Q2019.
Credit: Bloomberg
The drillship orders arrived just a day after fellow rigbuilder Keppel announced contracts from Petrobras to build five semi-submersible drilling rigs for work in water depths of up to 3,000m and drilling depths of 10,000m worth US$4.1 billion and scheduled for delivery until 3Q2019. In total, Keppel is now building six semi-submersibles for the Brazilians. On Aug 10, Keppel also announced a contract to build and install the topside modules for two floating production, storage and offloading (FPSO) vessels worth US$950 million to be deployed in Brazil.
The slew of orders from Brazil comes about three years after Petrobras first initiated the tender process for 28 new and locally built deepwater rigs and could take the order books of the two rigbuilders to record highs this year. Indeed, Jason Saw, an analyst with DMG & Partners, estimates that Keppel and SembMarine currently boast net order books of $14 billion and $11.6 billion, respectively.
TOO MUCH, TOO SOON?
However, analysts warn that both stocks may have run up a bit too much in the short term. For one, “the exceptional orders won by the yards this year will be tough to sustain going forward”, says Janice Chua of DBS Vickers. Owing to the tougher operational environment in Brazil, she expects margins for the two yards to be lower than in previous years.
In addition, the two local rigbuilders are not building as many deepwater drillships and rigs — which are in demand right now — as the South Koreans, who are the global leader in this area. “Demand for deepwater rigs is increasing on a worldwide basis,” says Rod Hutton, rig specialist at market intelligence firm IHS Petrodata. By year-end, only seven ultradeepwater rigs will be available and the number will only increase to 37 by 2014. “Deepwater activity remains very strong in West Africa and the US Gulf in addition to Brazil. [Meanwhile], smaller but still significant deepwater markets are building up in East Africa, the Eastern Mediterranean, Southeast Asia, India and Australia,” he adds.
Nevertheless, Hutton admits that Singapore remains the hub for jack-up rigs. Indeed, of the 95 jack-ups currently on order or under construction worldwide, almost half are being built by the Singapore yards.
The order wins from Petrobras are also indicative of the advantage Keppel and Semb- Marine have over their competitors as a result of setting up their own yards in Brazil. More importantly, with Petrobras gunning to produce some 4.2 million barrels per day (bpd) by 2020 from two million bpd in 2011, Keppel and SembMarine are well positioned to win a significant proportion of work from the Brazilian company in the months to come. “The commitment of the Singapore yards to expanding to Brazil has been rewarded with mega orders from Petrobras,” writes Saw in an August report.
Indeed, of the 47 shipyards with a licence to operate in Brazil, 11 are still under construction, while just a handful of the existing yards are capable of building rigs and production systems, according to Brazilian shipyard association Sinaval. As such, analysts are expecting orders for the additional rigs as well as rig repair and upgrading jobs to flow into Keppel’s and SembMarine’s yards in Brazil. Already, Petrobras is expecting some 38 production platforms — that is, large offshore rigs with facilities to drill for oil and temporarily store it — to come on stream during the period. “Brazil will become a significant builder of deepwater rigs in the next 10 years,” Hutton points out.
Keppel established its yard in Angra dos Reis in 2000 and has enjoyed a steady flow of work from Petrobras and other oil companies operating in Brazil, including the upgrade of a drillship for Noble Energy as well as the building of the first semi-submersible for the Brazilians based on its own design. It is also developing a 7.6ha specialised yard in Navegantes, Santa Catarina. Meanwhile, SembMarine recently began operations at its partially completed 82.5ha yard in Aracruz, Espirito Santo, which is capable of undertaking the construction of drillships, semi-submersibles and jack-up rigs as well as topside modules for FPSO vessels.
Image: Keppel established its yard in Angra dos Reis in 2000 and has enjoyed a steady flow of work from Petrobras and other companies. Credit: reuters
Running a shipyard in Brazil is no easy feat. For one, about 65% of the employees hired by shipyards in Brazil must be locals to meet the country’s labour requirements. As a result, yard operators must invest time and money to train the workers. In addition, operating in Brazil involves higher supplychain costs and longer delivery times. That has deterred other rigbuilders from entering Brazil and eliminated much of the competition for Keppel and SembMarine in one of the world’s largest oil- producing regions. In March, for instance, South Korean shipyard Samsung Heavy Industries pulled out of a consortium that had been bidding for Petrobras’ drillship contracts, citing work delays faced by its partners.
UPCYCLE TO CONTINUE
Meanwhile, demand for rigs by oil companies operating in other oil producing regions in the world will likely increase, and analysts expect some of the orders to trickle into Singapore’s yards. On Aug 21, Keppel received an order by offshore accommodation operator Floatel International to build a new-generation harsh-environment-accommodation semi-submersible worth US$315 million. The contract comes after two previous orders to build similar semi submersibles for Floatel in 2010 and 2011. It also comes after Sembmarine announced a contract worth US$135 million from Diamond Offshore to rebuild a second-generation semi-submersible — its second contract win
in two weeks.
“While this is a relatively small contract for SembMarine’s $8.9 billion year-to-date order wins, we believe the contract is still incrementally positive for the company,” analysts at Barclays write. “There have been positive comments from the deepwater drillers over the US earnings season, suggesting that there is no more rig capacity available in 2012, and 2013 looks increasingly supply-constrained. We believe this could incentivise more drillers to pursue similar upgrades to have capacity available in 2014, which would support further orders for the rigbuilders such as SembMarine.”
Other analysts agree that the stocks are in for more upside over the next 12 months. “Keppel is a safe bet for the long term, we believe, backed by a proven track record in Brazil,” write Lim Siew Khee and Yeo Zhi Bin of CIMB. Meanwhile, the analysts believe that availability at SembMarine’s new yards should enable it to lock in contracts at higher prices from “latecomers to the rig-building cycle”. They expect both yards to clinch an additional $2.5 billion of orders by year-end.
Lim and Yeo have “buy” recommendations on the yards, and currently favour Keppel, “given its lagged year-to-date performance versus Sembcorp”. They have a price target of $14.80 for Keppel and $5.85 for SembMarine, representing upsides of up to 28.5% and 15%, respectively.
DBS Vickers’ Chua expects margins to stabilise and eventually rise on the back of strong order momentum and the yards’ solid execution track record and market lead in the jackup and semi-submersible space. She has “buy” calls on both Keppel and SembMarine, with target valuations of $13.20 and $5.85 on the stocks, respectively.
Saw of DMG also believes the two yards are still looking cheap. At their current levels, Keppel is trading at 11.4 times forward earnings and SembMarine, at 16.8 times forward earnings. “The valuations for Keppel and SembMarine are undemanding compared with historical valuations,” writes Saw. He points out that at their peak, the two yards had traded at 22 and 28 times forward earnings, respectively. Saw’s top pick is Keppel, with a target valuation of $13.80, representing an upside of about 20%. He also has “buy” calls on SembMarine and Sembcorp, with price targets of $5.70 and $6.28, representing upsides of 12% and 10%, respectively.
Sembcorp marine ($5.06) — Temporary consolidation
A temporary retreat is underway. This should find support as it approaches the rising 50- day moving average at $4.87. If the market remains resilient, prices should not fall below $5. Overall, the uptrend remains intact, and is supported by the positive cross between the 50- and 100-day moving averages made about a week ago. Quarterly momentum is in positive territory, and rising.
The break above $5.14 indicates an initial target of $5.40 to $5.50 and an eventual upside of $6.20.
