Thursday, 30 October 2008
Singapore Rig Builders Yet To Bottom Despite Buy Calls
Singapore rig building giants Keppel Corp. and Sembcorp Marine Ltd. may have plummeted since the beginning of the year, with analysts now saying they look good value, but factors ranging from the falling oil price to tight credit mean shares may not have reached their floor yet.
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Singapore Rig Builders Yet To Bottom Despite Buy Calls
By P.R. Venkat
29 October 2008
Singapore rig building giants Keppel Corp. and Sembcorp Marine Ltd. may have plummeted since the beginning of the year, with analysts now saying they look good value, but factors ranging from the falling oil price to tight credit mean shares may not have reached their floor yet.
Of seven analysts polled by Dow Jones Newswires, five have a “buy” call on both Sembcorp Marine and Keppel, while only two have a “hold.”
But while a backlog of orders to be filled means revenue for the next two to three years looks assured, the slowing world economy and a sharp fall in global crude oil prices is likely to see the pipeline of orders that has to date flowed so freely drying up.
Keppel and Sembcorp Marine have shed as much as 68% since the start of 2008, underperforming a 52% drop in the Straits Times Index. Tuesday Keppel closed at S$4.15 a share, while Sembcorp ended at S$1.30.
Even analysts with “buy” calls concede that the outlook is troubled, but say that the stocks are probably now oversold.
“We are compressing our order-book assumptions (for Keppel),” said Winnifred Heap of J.P. Morgan in a recent research note. She added that profit will likely rise just 1% next year and be flat in 2010. Although J.P. Morgan has a buy rating on Keppel, the target price as been cut to S$7 from S$12.
Those that favour buying Keppel point to its order book as guaranteeing a steady earnings flow until around 2011. “We do not expect widespread cancellations of Keppel’s order book and maintain offshore net profit forecast of S$632 million for 2009 and S$650 million for 2010,” UBS Investment Research, which also has a “buy” call on Keppel, said in a report. UBS expects Keppel’s offshore net profit for 2008 to be about S$569 million.
But market expectations for future orders - typically over two to three years - play a key role in the performance of Sembcorp Marine and Keppel shares, and while current healthy order books account for revenue through 2011, this is already largely priced in.
Investors have started to look to prospects beyond 2012, when revenue will be dictated by orders from this year. But with demand slowing and uncertainty mounting, many holders have been ditching the stock, said an analyst with a local brokerage, who didn’t wish to be named.
“With the kind of uncertainty surrounding the market, Keppel can fall to as low as S$3.40 a share, while Sembcorp Marine might go down below S$1.30 a share, the analyst said.
J.P. Morgan’s Heap has conceded that Keppel might not win any more new orders this year and may end up with only S$1 billion orders each in 2009 and 2010. So far, in 2008, the company has secured contracts worth S$5.2 billion.
Announcing its third quarter results on Oct. 23, Keppel acknowledged its offshore & marine division - Keppel Marine - will face a slowdown in new order momentum. Keppel Marine accounts for 71% of the group’s revenue and 54% of its net profit.
Similarly, Sembcorp Marine, which also specializes in building rigs, will face the chill of an economic downturn and falling demand for oil.
A Sembcorp official said the company would not give an outlook before it publishes its third quarter results in November, but admitted that the situation had changed since August, when it announced its second quarter results and the industry fundamentals were still strong due to high oil prices.
“We are reviewing our rating and target price for Sembcorp because we see a drastic slowdown in new orders,” said Serene Lim of DMG & Partners Securities. Lim has a “buy” call on the stock with a target price of S$4.28.
Falling Oil Prices Deterring New Exploration, Drilling
Analysts say that with global crude prices dropping sharply in recent months, and with nobody willing to bet on when an international economic recovery may start, oil companies will likely cut back spending on exploration and drilling new oil and gas reserves.
They point out that usually, oil companies keep $70-$60 a barrel as their internal estimate at which it becomes economically viable to commence additional drilling.
Crude oil prices have plunged more than 55% in the last three months from record highs of $147.27 a barrel in July to $64.82 a barrel Tuesday.
“We believe that some future oil projects would be delayed or scrapped if crude oil prices remain below $80 a barrel. Below this price level, we forecast the price and pace of new contracts accepted by rig builders like Keppel Corp. will be affected negatively,” said Chris Sanda of Daiwa Institute of Research.
He has an “underperform” rating for both Keppel and Sembcorp Marine.
Adding to the problem is the credit crunch. As exploration and production is a highly capital intensive business, the current financial crisis is forcing companies to roll back on their capital spending plans.
“[I]n the foreseeable future, some rig owners” ability to expand their fleet could be constrained by tight credit,” Keppel warned in its Oct. 23 earnings report.
“The continued liquidity crisis may damp exploration and production spending and hence offshore & marine equipment capital expenditure plans,” said Rigan Wong and Horng Han Low of Citi in a recent report.
Citi has downgraded Sembcorp Marine to a “hold” from a “buy” and raised the risk rating to “high risk.” It has cut the target price to S$2.85 from S$4.95.
Companies like Brazil’s Petrobras and a number of Russian energy operators have also acknowledged the problems they face raising cash in the current environment; Norwegian rig contractor MPF has already filed for bankruptcy due to its inability to secure cash injections.
“The deteriorating credit environment has introduced risks previously unimagined and led us to turn cautious on the O&M sector,” said the Citi report.
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