Sembcorp Marine - Secures second SeaDragon US$237 million rig order; crystallization of April '09 option

SMM secures 2nd rig order from SeaDragon worth US$237.3 million; crystallization of April’09 option: Sembcorp Marine has secured a 2nd SeaDragon rig order (first rig order was reported in April 2009) to complete and deliver a Moss Maritime Fully Dynamically Positioned (DP-3) semi-submersible drilling unit. The contract is worth US$237.3 million excluding equipment supplied by owner with the hull having been built in a Russian yard (which arrived at Jurong shipyard in early June 2009). While the first rig (order win in April 2009) is contracted with Pemex for five years, this recent rig is un-contracted for now.

Why is contract value only for US$237.3 million versus new build of US$500-600 million?: Given that the hull has been constructed at the Russian yard and transported to Jurong and the rig contract is on an ex-equipment basis, the contract value is only at US$237.3 million versus a usual price tag of US$500-600 million for a new build semi-submersible.

Year to date "new contracts" stand at S$954 million versus JPM estimate of S$1 billion for FY09E; steady recovery of order-book momentum? Sembcorp Marine has achieved in total, new contracts worth S$954 million versus our FY09E estimate of S$ 1billion. Moreover we believe we could see S$500-800 million upside risk to our current estimate of new contracts as we'd expect to see additional orders in 2H09; however more related to conversion work as against 'new build rig’ orders.

Petrobras still the ‘clearest & biggest opportunity’; SMM willing to consider drillships? During the 1Q09 conference call, management had indicated that they would be willing to consider drillship orders and highlighted they have been approached in the past in this regard. PBR’s 1st batch of 5-7 rigs (out of 28 rigs) is likely to bid out in 2H09.

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Ezion Holdings Limited: High risk, high return

Biggest owner of liftboats in Southeast Asia by 2010. Ezion provides marine logistics and support services to the offshore oil and gas industry, and owns a large fleet of 16 ballastable barges. Ezion will also be the biggest owner of liftboats in Southeast Asia when it takes staggered deliveries of four new generation vessels in the next 18 months.

Liftboats are the biggest earnings driver in FY10. The first 2 liftboats will be delivered between late 2009 and 1Q10, and were already chartered out to Ezra Holdings on firm contracts. The second pair has secured LOIs for deployment to a Middle East-based client. These vessels could generate charter revenue of US$16-17m per vessel per year. Key risks are liftboat delivery delays from yards, and clients’ requests for later commencement dates for their contracts with Ezion.

Gorgon Project may boost industry credibility. Ezion is part of a consortium that has secured from Chevron an initial A$350m worth of marine supply contract for the Gorgon Project off the coast of Australia. Ezion would earn project management fees and income from the supply of 9 offshore vessels to the Gorgon projects. Key risks are postponement in vessel supply requirements and poorer-than-expected execution.

Initiate coverage with a BUY rating. We project Ezion to deliver 106% net profit CAGR over the FY09-11 forecast periods, assuming on-schedule deliveries of vessels. As such, we initiate coverage on Ezion with a BUY rating. Our fair value for Ezion is S$0.76; using 10x fully diluted recurring FY10 PE.

SMM recovers amounts due from PetroRig I

With the resolution of the PetroRig I sale, we are raising our recommendation on Sembcorp Marine (SMM) to a Hold. However, the outlook for rig newbuilds still remains muted at this point, and we remain unexcited over the medium term.

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.