Report puts sell on SembCorp

“With the upcoming rig capacity in 2011 and 2012 and uncertain outlook in the ultra-deep-water segment post US Gulf incident, it is difficult for us to turn bullish on new rig orders. We remain muted on newbuild orders outside of Brazil,” the bank said in its latest 2010 E&P spending report.
The report did point out that Brazil is a different animal as the supply-demand equilibrium is self balanced within its own market due to local content requirements.
The bank believes SembCorp Marine is over-valued and recommended investors sell the stock, while it placed hold ratings on stocks in South Korea’s Daewoo Shipbuilding and Samsung Heavy Industries, as well as Singapore’s Keppel. The bank sees upside potential in South Korea’s Hyundai Heavy Industries and placed a buy rating on the stock.
DnBNOR, which surveyed over 70 oil and gas companies for the report, thinks all yards will struggle in the next couple of years due to a general overcapacity both in the offshore yards and shipping yards. However, the Norwegian-based bank said there is a mismatch between expectations for the offshore versus shipping yards.
“The market has priced in a severe downturn for shipping whereas it seems to expect new orders for rigs to come back soon.”
The bank said it reiterated its sell recommendation on SembCorp Marine as it believed the story of potential upside risk from Brazilian orders is oversold and the profitability is questionable.
Brazil’s state-run energy giant Petrobras is expected to award orders for 28 offshore drilling rigs during the fourth quarter. DnBNOR believes this is widely expected by the market for SembCorp Marine to win one of the four packages of seven drillships. But the bank takes a neutral position as it believes the margins to build in Brazil for such high-specification ultra deep-water drilling units are likely to be weak or negative.
“We would be positive if SembCorp Marine can secure Petrobras orders on a cost plus margin basis, which would then pose upside risks to our new order assumptions and valuation,” added the bank.
The bank remains buoyant about the prospects of Hyundai Heavy Industries citing its aggressive strategy on winning orders for production untis, such as floating production, storage and offloading, as well as fixed platforms, from the offshore sector to offset its anticipated reduced dependency on shipbuilding orders.