On June 8, SMM had announced that it had sold the semisubmersible PetroRig I to Diamond Offshore in order to recover monies due to them following the non-payment by the customer, Petromena. Diamond has disclosed a price of around US$460, of which SMM will receive its outstanding amount of US$200, plus administrative costs. The balance of the amount will be returned to the original bondholders of the project.
With the healthy reported selling price of US$460m, this assuages concerns of SMM’s other 2 rigs being built under the same specifications for Petromena. SMM has collected 50% of these contracts amounts, and believes that it would be able to dispose of the rigs in a similar manner at no loss if Petromena should once again default on payment. The sale also indicates that demand for such deepwater rigs remains healthy, and that SMM is able to protect itself against such default contingencies.
However, despite continued interest in the deepwater segment, we do not see this translating to significant orders, despite an improving credit environment. SMM’s last reported orderbook stood at $8.4b stretching to 2012, and has since announced orders worth S$230m for an offshore platform contract for SMOE, as well as US$237m outfitting and completion order for a semisubmersible.
We are raising SMM’s price target to $2.73 from $2.31 previously, on higher shipyard multiples in our sum-of-the-parts valuation. Our FY09 net profit forecast of $497m remains unchanged. While 2-yr earnings CAGR is still a healthy 12.7% p.a., we expect turnover to taper off from 2011 onwards. While we do expect the rig market to pick up, we are unlikely to see the same strength as in the last boom cycle between 2005 and 2008. However, given its respectable earnings visibility and decent dividend yield, we raise the stock to a Hold.
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