Tuesday, September 22, 2009

DBS - Update on Singapore Offshore Sector

Below is the report by DBS Vickers on Singapore Offshore Sector:

Deepwater is still the safer bet

• Our industry analysis and channel checks show deepwater activities holding up relatively well.

• Charter rates for deepwater AHTS are expected to dip another 5-10%, at most, from current levels.

• Deepwater rig order would be the first to recover, when newbuilding normalizes from 2H 2010.

Our top picks are Sembcorp Marine (+17% to target price), Sembcorp Industries (+20%), CH Offshore(+28%), and Mermaid Maritime (+26%).
We like companies with exposure to deepwater market. Our top large-cap picks are Sembcorp Marine [BUY; S$3.70], and Sembcorp Industries [BUY; S$4.09]. Our top small-mid cap picks are CH Offshore [BUY; S$0.89] and Mermaid Maritime [BUY, S$1.17].

Charter rates for deepwater AHTS to hold up better than market’s belief. We expect the ratio of mid-large AHTS (>8,000 bhp) to floater to be 2.3-2.6x in the 2009-13 periods, contrary to market’s concern on oversupply issues. This is at the lower half of the theoretical 2-3x healthy range. We expect day rates for mid-large AHTS to drop another 5-10% from current levels, at most. This represents a decline of about 20% or less from peak levels in 2008.

Smaller AHTS may face more pressure than initially anticipated. We are less sanguine on the demand/supply situation for small AHTS (<8,000>
Deepwater rig order flows are expected to normalize in 2H 2010. We also stick to our view for newbuilding activities to pick up for good in 2H 2010 as credit normalizes upon economic recovery, and equipment prices decline as suppliers relent on diminished order books. Both Sembcorp Marine and Keppel Corp are expected to benefit from this trend, due to their global leadership in FPSO conversion, and semisubmersible rig construction.

Market’s hope for early Petrobras’ contracts may disappoint again. Consistent with our roadshows since early 2009, we expect Petrobras’ award of its first batch of 28 offshore rigs (7-9 units) to occur in 1H 2010. This is due to: 1) Still high equipment costs, 2) High local content requirement, 3) Petrobras has the benefit of “time” to sit out for better prices, 4) Lower margins for yards, 5) Tight credit market, 6) Probe by Brazilian Congress on past deals.

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