“We reiterate our stance that earnings are lagging indicators and contract wins are key catalysts during recovery,” says analyst Ho Pei Hwa in a Tuesday report.
And on the horizon, the signs ahead are looking brighter for Keppel and SembMarine.
According to reports, Petrobras and Sete Brasil have reached an agreement on the charter of four drilling rigs, which should remove an overhang.
While the units to be delivered were not disclosed, they are believed to be the ones near completion – the first two rigs each from Keppel and SembMarine.
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“The actual financial impact is dependent on: rig price and payment agreed to complete those units; any compensation on the receivables payable to shipyards; and plans on the other four half-built units,” says Ho. “In the broader scheme of things, we see the Petrobras-Sete rig deal as another positive indicator of demand recovery.”
At the same time, Keppel has signed a letter of intent with Awilco Drilling to build a harsh environment semisubmersible, with options to build up to a further three units at a price tag of US$425 million ($561 million) each.
“[This] has given rise to hopes of a revival for newbuild rigs,” says Ho. “This is very positive news for Keppel, marking a good start to the year.”
Meanwhile, Keppel has also confirmed it is in talks for a possible sale of jackup rigs to Borr Drilling.
Ho notes that Borr Drilling has also proposed to buy its rival, Paragon Offshore, for US$232.5 million in a push to consolidate the fragmented rig market.
“The acceleration of scrappage, coupled with improving rig demand is expected to lift the utilisation and day rates of rigs towards 2019, driving demand for newbuild rigs,” says Ho.
While there are signs of revived interest on newbuild rigs, Ho cautions that demand is not yet expected to make a big comeback.
“[Sembcorp Marine] remains our top pick to ride O&G recovery with its strong visible order pipeline while Keppel is a safer bet backed by its multi-pronged business strategy,” says Ho.
DBS has “buy” recommendations on Keppel and SembMarine, with target prices at $10.20 and $2.90, respectively.
As at 4.56pm, shares of Keppel Corp are trading 3 cents up at $7.66 while shares of SembMarine are trading 11 cents up at $2.01.
