Sector update and quarterly preview Asia Offshore Divergence between sector’s fundamentals and share prices Asian Offshore Supply 17.10.2011 Asian Offshore Supply vs STI (12m) 70 80 90 100 110 120 130 Oct Dec Feb Apr Jun Aug Oct Asian Offshore Supply STI (Rebased) Analysts: Kay Lim, CFA +65 6220 5123 [email protected]Simon Jong +65 6223 3604 [email protected]Thor Andre Lunder +44(0)20 7621 6085 [email protected]Please see the last page for important information. In this market, macro factors are more influential than industry- and company-specifics. The recent rout in shares prices has wiped USD10bn off market values in our coverage list since August (-28%, versus the market’s -14%). We argue that investors have overreacted due to the sector’s cyclical nature and have discounted a weaker cycle (33% discount to long- term NAV, attractive earnings multiples – Asian players trading at 7x 2012e P/E) than in a normalised period (valuations near to NAV and 10-12x 2012e P/E, while trough was 4x). The sector’s fundamentals remain positive, driven by top-down (rising E&P spending) and bottom-up (valuations and company-specific) factors. Company Rec Previous Rec Currency TP Prev TP Share price Upside Swiber Singapore 226 BUY BUY SGD 1.00 1.00 0.57 77% Ezra Singapore 604 BUY HOLD SGD 1.20 1.45 0.97 24% Otto Marine Singapore 208 SELL SELL SGD 0.12 0.14 0.14 -14% ASL Marine Singapore 174 BUY BUY SGD 0.85 0.85 0.53 62% CH Offshore Singapore 219 BUY BUY SGD 0.65 0.65 0.40 65% Ezion Singapore 315 BUY BUY SGD 0.90 0.90 0.53 70% KS Energy Singapore 317 BUY BUY SGD 1.22 1.22 0.99 23% Jaya Singapore 273 BUY BUY SGD 0.90 0.90 0.45 100% Kencana Malaysia 1,571 Under review Under review MYR 2.15 2.15 2.54 -15% SapuraCrest Malaysia 1,677 Under review Under review MYR 3.00 3.00 3.90 -23% EOC Norway 122 HOLD HOLD NOK 7.0 7.0 6.2 13% Kreuz Singapore 130 BUY BUY SGD 0.45 0.45 0.33 38% Keppel Singapore 12,196 BUY BUY SGD 10.00 10.00 8.70 15% Sembcorp Marine Singapore 6,293 BUY BUY SGD 4.70 4.70 3.86 22% STX OSV Singapore 1,041 BUY BUY SGD 1.90 1.90 1.12 70% Country listed Market cap (USDm) • Divergence between share prices and activity. In our view, there is a divergence between what is discounted in Asian companies’ share prices and real activity. We argue that E&P spending (our annual survey, done in August, pointing to 14% growth and oil price has held up well since then) is a good leading indicator of forward earnings in the oil services industry, and is expected to drive activity in offshore support over the next 1–3 years. Activity (projects, enquiries, tenders, utilisation, requirements) remains robust in most markets, largely unaffected by macro conditions. Macro weakness could result in a short- term slowdown, but we remain optimistic on the sector’s medium- and long-term fundamentals. This is likely to have a positive impact on Asian oil services companies’ 2012–2013 earnings. • Investment approach. We advise investors to be selective, and we favour companies with a high ROE, high FCF-generating assets, and a solid balance sheet (low gearing). Factors that differentiate stronger companies include asset quality, good management and soft factors. We believe that companies with these attributes, backed by the fundamentals to capitalise on opportunities and that are more likely to emerge even stronger, include: Large caps: SMM (BUY), KEP (BUY). We believe their share prices should be the first to move when buying resumes, as they are perceived as stronger and their blue-chip status offers trading liquidity. Both are priced attractively against their normalised earnings cycle. Mid-caps: STX OSV (BUY) for its undemanding multiples, high ROE, strong FCF-generating business backing our DCF, strong balance sheet (net cash and low capex), good dividend yield, high quality order book, and good trading liquidity. Small caps: Ezion (BUY) and Jaya (BUY). We include Ezion as a good FCF-generating business (key assets locked-in by term contracts), and Jaya for its changing business model that could put it on the M&A radar of offshore companies, where investors have yet to price in the potential upside. Other small-caps under our coverage are trading at attractive valuations, but this might not be the right time to go long unless one is willing to stomach higher volatility and lower trading liquidity. • Recommendation change. We have upgraded Ezra from HOLD to BUY.
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Sector update and quarterly preview Asia Offshore
Divergence between sector’s fundamentals and share prices Asian Offshore Supply 17.10.2011 Asian Offshore Supply vs STI (12m)
70
80
90
100
110
120
130
Oct Dec Feb Apr Jun Aug Oct
Asian Offshore Supply
STI (Rebased)
Analysts: Kay Lim, CFA +65 6220 5123 [email protected] Simon Jong +65 6223 3604 [email protected] Thor Andre Lunder +44(0)20 7621 6085 [email protected] Please see the last page for important information.
In this market, macro factors are more influential than industry- and company-specifics. The recent rout in shares prices has wiped USD10bn off market values in our coverage list since August (-28%, versus the market’s -14%). We argue that investors have overreacted due to the sector’s cyclical nature and have discounted a weaker cycle (33% discount to long-term NAV, attractive earnings multiples – Asian players trading at 7x 2012e P/E) than in a normalised period (valuations near to NAV and 10-12x 2012e P/E, while trough was 4x). The sector’s fundamentals remain positive, driven by top-down (rising E&P spending) and bottom-up (valuations and company-specific) factors.
Company Rec Previous Rec Currency TP Prev TPShare price Upside
• Divergence between share prices and activity. In our view, there is a
divergence between what is discounted in Asian companies’ share prices and real activity. We argue that E&P spending (our annual survey, done in August, pointing to 14% growth and oil price has held up well since then) is a good leading indicator of forward earnings in the oil services industry, and is expected to drive activity in offshore support over the next 1–3 years. Activity (projects, enquiries, tenders, utilisation, requirements) remains robust in most markets, largely unaffected by macro conditions. Macro weakness could result in a short-term slowdown, but we remain optimistic on the sector’s medium- and long-term fundamentals. This is likely to have a positive impact on Asian oil services companies’ 2012–2013 earnings.
• Investment approach. We advise investors to be selective, and we favour companies with a high ROE, high FCF-generating assets, and a solid balance sheet (low gearing). Factors that differentiate stronger companies include asset quality, good management and soft factors. We believe that companies with these attributes, backed by the fundamentals to capitalise on opportunities and that are more likely to emerge even stronger, include:
Large caps: SMM (BUY), KEP (BUY). We believe their share prices should be the first to move when buying resumes, as they are perceived as stronger and their blue-chip status offers trading liquidity. Both are priced attractively against their normalised earnings cycle.
Mid-caps: STX OSV (BUY) for its undemanding multiples, high ROE, strong FCF-generating business backing our DCF, strong balance sheet (net cash and low capex), good dividend yield, high quality order book, and good trading liquidity.
Small caps: Ezion (BUY) and Jaya (BUY). We include Ezion as a good FCF-generating business (key assets locked-in by term contracts), and Jaya for its changing business model that could put it on the M&A radar of offshore companies, where investors have yet to price in the potential upside. Other small-caps under our coverage are trading at attractive valuations, but this might not be the right time to go long unless one is willing to stomach higher volatility and lower trading liquidity.
• Recommendation change. We have upgraded Ezra from HOLD to BUY.
Sector report > Asian Offshore Supply
DnB NOR Markets - 2
17.10.2011
Table of Contents
ASIAN OFFSHORE SECTOR UPDATE ................................................. 3
COMPANY SPECIFICS – QUARTERLY PREVIEW FOCUS................... 18
ASL MARINE (BUY, TP SGD0.85) ................................................... 19
Asian offshore sector update Key investment thesis– activity remains strong at industry level With the 2008 global financial crisis still fresh in most investors’ memory, there is plenty of fear and pessimism in current investment judgment. The macro sell-down has systematically driven Asian offshore shares lower. The sector (including yards) has underperformed the market, -25% YTD versus the market’s -14%. We believe this is driven mainly by investors’ fear that persistent macro weakness could eventually drive oil prices down and lead to E&P spending cuts.
Macro factors have become more influential than industry and company-specifics in today’s market. Therefore, it is challenging to call the bottom in the sector. However, with the sharp drop in share prices over past two months (though prices have rebounded somewhat lately) beyond the general market weakness, we argue that the selling is overdone and the sector looks attractive, with higher risk/reward payoffs. We argue that investors have overreacted due to the sector’s cyclical nature and have discounted a weaker cycle (33% discount to long-term NAV, depressed earnings multiples – Asian players trading at 7x 2012e P/E) than in a normalised period.
At the industry level, activity (projects, enquiries, tenders, utilisation, requirements, and contracts) remains robust in most markets, and seems largely unaffected by current macro conditions. Macro weakness could result in a short-term slowdown, but we remain optimistic on the medium- and long-term fundamentals of the sector.
From a top-down analysis, we believe a central driver of the offshore support industry is the aggregate level of oil companies’ E&P spending. From a bottom-up approach, we believe the fundamentals of a strong balance sheet, a robust business model, competitive strategies along with good execution, and a growing industry, drive returns and share prices longer-term.
In our view, there is a divergence between what is discounted in Asian companies’ share prices and real activity (fundamentals) on the ground, i.e. their intrinsic value. A company’s intrinsic value (NAV) is ultimately driven by its expected net cash flow, timing of cash flow, growth and risks. We argue that E&P spending is a good leading indicator in driving forward earnings of the oil services industry. Our fifth annual E&P spending survey this year pointed to 14% growth, which is expected to drive activity in the offshore support segment over the next 1–3 years. This is likely to have a positive impact on the earnings of Asian oil services companies in 2012–2013. Risk aversion should fall when companies’ earnings beat market expectations implied in current share prices.
Approach/strategy in the current market We advise investors to be selective in this market. We favour companies with a high ROE, high free cash flow-generating assets, and a solid balance sheet (low gearing). Factors that differentiate stronger companies include:
• Asset quality. Most Asian offshore companies’ main assets are OSVs, which many regard as a form of commodity; we believe otherwise. We argue that quality is important and this varies based on different specs.
• Good management is required to ensure that optimal returns from assets are generated, i.e. good returns from normal assets in contrast to weak returns from good assets.
• Soft factors. Skill-sets are important, along with project planning, relationships, R&D, and market knowledge.
We believe that companies with these attributes, backed by the fundamentals to capitalise on opportunities and that are more likely to emerge even stronger, include:
• Large cap: SMM (BUY), KEP (BUY). We believe their share prices should be the first to move when buying resumes, as they are perceived as stronger and their blue-chip status offers trading liquidity.
• Mid cap: STX OSV (BUY), also our top pick, for its undemanding multiples, high ROE, strong FCF generating business backing our DCF valuation (with high barriers to entry as a high-end OSV yard), strong
Sector report > Asian Offshore Supply
DnB NOR Markets - 4
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Brent price: staying resilient
Brent price
0
20
40
60
80
100
120
140
160
Ap
r-0
7
Jun
-07
Au
g-0
7
Oct
-07
De
c-0
7
Fe
b-0
8
Ap
r-0
8
Jun
-08
Au
g-0
8
Oct
-08
De
c-0
8
Fe
b-0
9
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct
-09
De
c-0
9
Fe
b-1
0A
pr-
10
Jun
-10
Au
g-1
0O
ct-1
0
De
c-1
0
Fe
b-1
1A
pr-
11
Jun
-11
Au
g-1
1
US
D
Source: Bloomberg
balance sheet (net cash and low capex), good dividend yield of 5% (minimum payout ratio of 30%), high quality order book of NOK16.7bn offering 17 months visibility, and good trading liquidity (average SGD12m shares traded daily).
• Small cap: Ezion (BUY) and Jaya (BUY). We include Ezion as a good FCF generating business, and Jaya for its changing business model that would likely put it on the M&A radar of offshore companies, where investors have yet to price in the potential upside. Other selected small-caps under our coverage are trading at attractive valuations, but now might not be the right time to go long unless one is willing to stomach the higher volatility and lower trading liquidity. The imbalances of supply (some small-cap names are tightly held by founding families) and demand of shares in the market can result in huge price swings.
We still advise investors to avoid Otto Marine (SELL), due to the potential negative triggers (see later in the note).
Key recommendation and price target changes of our Asian coverage
Company Rec Previous Rec Currency TP Prev TP
Swiber Singapore BUY BUY SGD 1.00 1.00Ezra Singapore BUY HOLD SGD 1.20 1.45Otto Marine Singapore SELL SELL SGD 0.12 0.14ASL Marine Singapore BUY BUY SGD 0.85 0.85CH Offshore Singapore BUY BUY SGD 0.65 0.65Ezion Singapore BUY BUY SGD 0.90 0.90KS Energy Singapore BUY BUY SGD 1.22 1.22Jaya Singapore BUY BUY SGD 0.90 0.90Kencana Malaysia Under review Under review MYR 2.15 2.15SapuraCrest Malaysia Under review Under review MYR 3.00 3.00EOC Norway HOLD HOLD NOK 7.0 7.0Kreuz Singapore BUY BUY SGD 0.45 0.45Keppel Singapore BUY BUY SGD 10.00 10.00Sembcorp Marine Singapore BUY BUY SGD 4.70 4.70STX OSV Singapore BUY BUY SGD 1.90 1.90
Country listed
Source: DnB NOR Markets
Pricing in a weaker-than-normalised cycle The macro sell-down has systematically driven down the price of Asian offshore shares. The Asian offshore sector (including yards) has underperformed the broader market, down 25% YTD compared to the general market decline of 14%. We believe this is mainly driven by investors’ fear that persistent economic weakness could eventually drive oil prices lower, resulting in a reduction in E&P spending. Short-term bearish factors to oil prices include the acceleration of reduced demand globally (on the back of weak US data, and decline in Chinese demand).
We acknowledge that macro headwinds can dampen and slow investment decisions. However, beyond short-term bearish factors, the Brent oil price, down 5% since the August sell-off, remains robust at USD111/bbl, supported by medium-term fundamentals (non-OECD demand still grows far more quickly than non-OPEC supply), low spare capacity and larger OPEC budget requirements.
Brent oil’s current price of USD111/bbl, provides an attractive price environment, and in turn, a favourable investment climate for oil companies.
Would activity level track recent bearish share price movements? As touched on earlier, macro issues have become a larger swing factor than industry and company-specifics in today’s market. Therefore it is a challenge to call the bottom of the Asian offshore sector. However, with a sharp fall in share prices beyond general market weakness, we argue that the selling is overdone and that the sector looks attractive with higher risk/reward payoffs.
We argue that investors have overreacted due to the sector’s cyclical nature and have discounted a weaker cycle than in a normalised period (33% discount to long-term NAV, attractive earnings multiples – Asian players trading at 7x 2012e P/E).
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Capex split for E&P
Source: DnB NOR Markets
At the industry level, activity (projects, enquiries, tenders, utilisation, requirements, and contracts) remains robust in most markets, and seems largely unaffected by current macro conditions. Macro weakness may result in a short-term slowdown, but we remain optimistic on the medium- and long-term fundamentals of the sector.
E&P spending – leading industry barometer From a top-down analysis, we believe that a central driver of the offshore support industry is the aggregate level of oil companies’ E&P spending. E&P spending is dependent on several underlying factors, with the oil price, major oil discoveries, and demand for oil and gas being the most important.
In our view, there is a divergence between what is discounted in share prices of Asian companies and real activity (fundamentals) on the ground. We see a large divergence between what is discounted in current share prices and their intrinsic values. A company’s intrinsic value (NAV) is ultimately driven by its expected net cash flow, timing of cash flow, growth and risks. We argue that E&P spending is a good leading indicator in driving forward earnings of the oil services industry.
We do not believe current activity (driven by E&P) is behind the curve and would track recent share price movements, which are pointing to negative momentum. Our fifth annual E&P spending survey this year pointed to 14% growth, which is expected to drive activity levels in the offshore support segment over the next 1–3 years. This is likely to have a positive impact on the earnings of Asian oil services companies in 2012–2013.
Risk aversion should fall when companies’ earnings beat market expectations. Asset prices should grow ahead of the rates and activity cycle, but current share prices are not reflecting this.
Total E&P spending forecast set to increase 14% in 2011e
0
100,000
200,000
300,000
400,000
500,000
600,000
1975
1980
1990
2000
2005
2010
2011e
2012e
2013e
USDm
0
20
40
60
80
100
120
USD/bbl
E&P Spending WTI crude price
14%
8%
7%
Source: DnB NOR Markets, FactSet
Prices for oil services have increased, pointing to supply tightening The CERA index is expected to increase by 5% in 2011 YOY. This is due to a normalisation from the dip in 2009 and increased E&P spending.
Activity still going strong, in fact improving Based on industry data points and sources, activity levels (fixtures, contracts, enquiries, tenders) in various divisions (subsea, seismic, drilling, support) are picking up, with some markets (Saudi, North Sea, increasingly the Arctic, Australia, SEA – Malaysia, Thailand and Indonesia) showing strong demand for oil services. These E&P projects typically have a long lifecycle, implying that the current cycle is not yet over.
In our E&P report, based on the surveyed oil companies’ expectations, we estimate this year’s oil service prices to increase by 5% YOY, implying 9% activity growth.
We adopt the view that activity momentum could continue to drive utilisation and rates of the Asian oil services players, in turn driving their earnings. This would result in earnings multiples compression and higher valuations warranted for the sector. The combination of depressed valuations in the sector and the resumption of earnings growth create attractive entry points for some companies in Asia.
Certainty of oil production remains the focus of oil companies The price of oil will always be one of the key drivers of spending; however, forecasting oil prices is a real challenge. The focus of oil companies is not on timing the market (introducing new production when oil prices are high) but rather on being confident in their oil production supply. We are facing a structural decline in oil supply and the global oil replacement ratio is 87%. Hence, this increases the urgency for oil companies to replace oil produced. Any late production will directly affect cash flows and incur revenue losses by way of lost opportunities, which is not in the interest of oil companies.
Sector report > Asian Offshore Supply
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Demand/supply Number of offshore supply vessels per ‘demand unit’ to come down in 2012e (assuming all demand units secure work) Number of vessels per demand unit increased as a result of more deepwater projects, subsea work, longer distances between installations, and safety regulations
High oil price needed to balance higher marginal cost of production The marginal cost of production is another key consideration – shallow water work is still very profitable at current oil price, with a USD25–35/day of production cost. The higher cost of production from deepwater fields, where the growth and marginal bbl of oil is likely to be found, would need oil prices at high levels to attract the returns and opportunity cost required by oil companies to invest in E&P in these regions.
Relationship between long-term production cost of oil and long-term hurdle rates
Hurdle rate Long Term (2010 report) Hurdle rate Long Term (2011 report)
CO
, EO
R
Arc
tic
Heavy oil and
bitumen
Produced
Other convent-ional oil
Oil shales
Gas to liquids
MENA
Deep and ultra
deepwater
FOR
Source: DnB NOR Markets, IEA – World Energy Outlook 2010, Schlumberger
Improving OSV demand/supply balance The ratio of OSV to one rig is expected to fall to 2.9 in 2012 and 2.8 in 2013, versus 3.0 in 2010–2011, pointing to an improving demand/supply balance.
We expect demand to pick up significantly in 2012, driven by: 1) the influx of new rig units entering the market requiring OSV support; 2) a healthier demand/supply balance in the OSV fleet due to fewer post-crisis vessel orders; and 3) improved activity from growth in E&P operations. We believe the market will be able to absorb the enlarged OSV fleet by 2012. Newbuild vessels entering the market over the next 1–2 years were mostly ordered during the peak in 2008–2009. Since the cycle turned, we have seen few new vessel orders. As a result, the demand/supply balance has improved, with a slowing rate of acceleration in the supply of vessels from 2011e.
We estimate that offshore supply vessels per ‘demand unit’ could peak in 2011. Over the past 20 years, the ratio has increased from 1.7x to 3x, driven by more subsea work, deepwater projects, longer distances between installations and more safety regulations.
With increasing E&P focus in the deepwater fields and difficult working conditions, the number of OSVs supporting an offshore rig installation is expected to rise. If this trend continues, combined with an ageing fleet and the potential ratio peak in 2011, the market should get tighter in 2012.
New rig orders driving incremental demand We maintain that new rigs ordered in the current cycle (from October 2010) including 56 jack-ups (21 outstanding options to be exercised) and 41 UDW floaters (15 outstanding options to be exercised) will require the support services of OSVs when they are delivered and working in 2013–2014e.
The key risk to our assumptions is weaker than expected utilisation for the ‘demand side’ rigs.
Sector report > Asian Offshore Supply
DnB NOR Markets - 8
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Demand expected to absorb excess tonnage
Ratio of OSV to installations, based on current known units
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
Ratio numerator: current fleet +
initial newbuilds based on ODS
data
Ratio numerator:
current fleet + adjusted newbuilds
based on our expectations
Adjusted for expected number of new rig units and fleet retirement
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
In red - Ratio numerator: current
fleet + initial newbuilds based on
ODS data In blue - Ratio numerator: current fleet + adjusted newbuilds based on our expectations and new
additional rigs
Excluding OSVs and rigs above 20 years
Source: ODS-Petrodata and DnB NOR Markets
NAV of OSVs Our NAV estimates are based on generic vessels, the prices of which differ according to the special equipment and varying technical specifications, even if vessels are identical in size. We have valued the fair market value of OSVs based on the following factors (note: we have made no significant changes): • Second-hand market values of comparable vessels (discounted to present
values if vessels are delivered in future years) from independent shipbrokers and shipowners (including the companies under our coverage, where we have cross-checked our values with management), and recent transacted prices collected mainly from ODS, RS Platou and Clarksons;
• DCF of floor values of vessels if they are backed by term charters; • In-house research (our long-term DCF and earnings assumptions on each
type of vessel); • The percentage mark-up of the cost of building vessels from similar yards,
adjusted for contracts between now and the newbuild delivery date; and • Multiples in the industry, using EV/EBITDA as a benchmark, with EBITDA
forecasts based on existing charter rates or long-term rates.
OSV vessel price trend – more data points to support our NAV We saw strong sales and purchase activity in the secondary market (21 OSVs changed hands) in September 2011. These transactions continue to offer support to our fair value (NAV) framework on similar types of vessels, after adjusting for age differences and specifications. Since 2010, the average and mean variance (transacted values minus our NAV for the 53 transactions with disclosed sale values) were positive USD1.7m and USD0.4m, respectively.
We argue that the current implied NAV (based on current share prices) of most Asian oil services players do not reflect a normalised cycle. Shares of offshore companies under our coverage (BUY recommendations) are trading at an average discount to NAV of 33%. Therefore, we believe that the current divergence between asset pricing and NAV offers high safety margins and an attractive risk/reward in selected offshore companies.
Using current dayrates as the input for long-term earnings capacity of a vessel and attaching the NAV as the capital outlay of that vessel, the projected asset yield is c11–15%. This is attractive among most asset classes. Coupled with the expectation of higher rates and utilisation from 2012, we believe that current asset prices offer a favourable risk/reward for investors.
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Transactions supporting our NAV Secondary market transactions
Date Type Vessel name Built (Yr)Size (dwt/
bhp) Seller BuyerValue
(USDm)
DnB NOR fair value
est (USDm)Variance (USDm)
Feb-10 PSV Krestrel K 2010 2,500 RK Offshore Tag Offshore 17 18 -1Feb-10 PSV Greatship Mohini 2010 4,600 Greatship Rem Offshore 45 45 0Feb-10 AHTS JM Gagah 2003 5,500 Jasa Merin Undisclosed 9 13 -4May-10 AHTS Skandi Emerald 2010 16,300 DOF Vietsovpetro 65 50 15May-10 AHTS Jaya Alliance 2009 5,150 Jaya Myklebusthaug 12 13 -1Jun-10 AHTS Petra Marathon 2010 12,240 Petra Perdana Up for sale 33 35 -2Jun-10 AHTS Petra Commander 2010 12,240 Petra Perdana Up for sale 33 35 -2Jun-10 AHTS Temasek Attaka 2001 5,400 CHO Bahtera 10 13 -4Jul-10 PSV Seabed Viking 2010 4,000 Norside Farstad 48 40 8Jul-10 PSV DOF TBN1 2010 4,800 DOF TBC 54 50 4Jul-10 PSV DOF TBN2 2011 4,800 DOF TBC 54 50 4Jul-10 PSV OOC Cheetah 2010 3,250 Bharati Shipyard Great Offshore 28 25 3Jul-10 AHTS Sanko C-series x 2009 9,500 Sanko Offshore Tidewater 25 27 -2Sep-10 PSV CS Topper 2001 3,835 Boa Offshore Topaz Marine 44 30 14Aug-10 AHTS Sanko Cosmos 2009 9,500 Sanko Offshore Tidewater 25 28 -3Aug-10 AHTS Sanko Cherry 2009 9,500 Sanko Offshore Tidewater 25 28 -3Aug-10 AHTS Redfish 1 2010 8,000 Otto Marine TBC 22 23 -2Oct-10 PSV Boa Rover 2001 3,835 Boa Offshore Topaz Marine 44 30 14Oct-10 PSV Newbuild 2011 3,200 Drydocks Tidewater 25 25 0Nov-10 AHTS Levoli Coral 2010 6,500 Pacific First Shipping Marnavi 18 17 1Nov-10 AHTS Amber 2005 4,800 CHO PT Bahtera 10 8 2Nov-10 AHTS Pearl 2008 12,240 CHO PT Bahtera 30 35 -5Dec-10 PSV Otto Explorer 2 2010 3,200 Otto Marine Ezra 34 26 8Jan-11 PSV Trico Sabre 2009 3,100 Trico Marine Ezra 26 25 1Jan-11 PSV Trico Star 2010 3,100 Trico Marine Ezra 26 25 1Jan-11 PSV Siem Mollie 2007 3,500 Siem Offshore Ezra 32 28 4Mar-11 AHTS Sea Marten 2010 6,800 Deep Sea Supply Topaz Marine 20 18 2Mar-11 AHTS Sea Otter 2007 6,500 Deep Sea Supply Topaz Marine 20 16 4Mar-11 PSV Siddis Mariner 2011 4,500 OH Meling Siem Offshore 61 45 16Apr-11 PSV Oak River 1974 1,082 Trico Marine Coastland Energy 1.1 - -Apr-11 PSV Roe River 1979 676 Trico Marine Coastland Energy 1.2 - -Apr-11 PSV Elm River 1981 980 Trico Marine Marine Energy 1.2 - -Apr-11 PSV Suwannee River 1977 584 Trico Marine Odekele Internati 0.7 - -Apr-11 AHTS Kerob Express 1975 1,150 Vroon BM Chart 1.5 - -Apr-11 PSV Newbuild 2010 3,200 Otto Marine Mermaid Marine 32 38 -7Apr-11 AHTS Newbuild 2010 8,000 Otto Marine Undisclosed 22 23 -1Apr-11 AHTS Newbuild 2010 8,000 Otto Marine Undisclosed 22 23 -1May-11 PSV Trico Service 2011 3,100 Trico Marine Ezra Holdings 27 25 2May-11 PSV Gulf sabre 1988 1,162 Gulf Fleet Bank One Equity 2 - -May-11 PSV Palma River 1988 1,226 Trico Marine Odyssea Marine 3 - -May-11 PSV Trinity River 1979 750 Trico Marine Lanex Corp 1 - -May-11 PSV Mana 2008 3,300 Global Offshore ServicSubsidiary of Glob 26 26 0May-11 PSV Otto Explorer 2009 3,200 Otto Marine Mermaid Marine A 32 25 7May-11 AHTS Redfish 3 2011 8,000 Otto Marine Undisclosed 22 23 -1May-11 AHTS Redfish 4 2011 8,000 Otto Marine Undisclosed 22 23 -1Jun-11 AHTS VOS Odyssey 1987 5,330 Vroon Offshore PT Wintermar 3 -Jul-11 AHTS Sanko Dragon 2006 8,160 Sanko Line Huawei Offshore 17 21 -4Jul-11 AHTS Jaya Almanac 2008 5,120 Jaya Offshore PT Logindo Samu 11 12 -1Jul-11 AHTS Sea Lion 2008 17,520 Deep Sea Supply Gazflot 63 56 7Aug-11 AHTS MP Prelude 2011 8,000 Marco Polo Marine PT Bina 20 22 -2Sep-11 AHTS MP Premier 2011 8,000 Marco Polo Marine PT Bina 20 22 -2Sep-11 AHTS - 2011 5,250 Nam Cheong Omni Offshore 14 13 1Sep-11 AHTS PFS Force 2010 6,500 Pacific First Shipping Tag Offshore 18 17 1Oct-11 AHTS Redfish 2 2010 8,000 Otto Marine Go Offshore 24 24 1Oct-11 PSV Malaviya Thirty O 2011 3,250 Great Offshore POSH Semco 31 25 6Median 0.4Average 1.7 Source: DnB NOR Markets, ODS, RS Platou, Company
Sector report > Asian Offshore Supply
DnB NOR Markets - 11
17.10.2011
OSV rates outlook – uptrend expected Information on rates in various international markets (Asia, West Africa) is generally not widely available as most contract terms are kept private by companies and operators. The North Sea spot market is traditionally a good indicator of the direction of international rates. Typically, we use the North Sea spot market, where information is widely available, as the proxy to establish a sense of how rates might develop internationally.
Average AHTS utilisation in the North Sea spot market was c72% from January to September 2011, compared with 67% over the same period last year, 65% in 2009 and 70% in 2008, without adjusting for the increase in the supply of vessels between 2008 and 2011.
For PSV, average utilisation in the North Sea spot market was c80% from January to September 2011, compared with 87% over the same period last year, 76% in 2009 and 83% in 2008, again, without adjusting for the increase in the supply of vessels between 2008 and 2011.
In terms of chartering rates in the North Sea spot market, YTD rates have strengthened YOY and even tested 2007 levels in some months. In the 13–18k bhp AHTS category, the average spot charter rates YTD, at GBP19,600/day, are higher than the 2010 average of GBP13,500/day. And in this year so far, June rates of GBP36,800 had briefly crossed the 2007 average of GBP34,100, which is an encouraging sign given that 2007 was the peak year in the cycle.
In the 18k+ bhp AHTS category, the average spot rate YTD is GBP27,500/day, 47% above the 2010 average of GBP18,700. In August and September, rates (averaging GBP48,000) moved close to the 2007 average of GBP51,600.
For the PSV category, charter rates are also rising. In Q3 2011, the smaller PSV (<3000dwt) was commanding an average close to GBP18,000/day (versus a 2010 average of GBP10,900 and a 2007 average of GBP21,600), while the larger PSV (>4,000dwt) was earning GBP19,500/day (compared with a 2010 average of GBP13,800 and 2007 average of GBP26,000).
We expect rates to strengthen further in 2012. Recent market weakness has not changed our belief that dayrates are likely to trend up as the supply/demand balance gets tighter in some markets. Internationally, we see increasing OSV fixtures and requirements in markets such as Malaysia, Indonesia, Vietnam, Thailand, the Middle East (Saudi Arabia, Qatar, Abu Dhabi), West Africa (Guinea), Brazil and Australia. These markets are increasing demand for vessel capacity for new project developments, step-up activity at existing projects and marginal field developments. This is expected to drive utilisation and charter rates of OSVs in these regions, but notably the impact will differ between markets due to differences in vessel classes and the nature of services provided.
High-end specialised vessels to benefit as we move deeper In recent years, we have seen a continuing trend of oil and gas companies moving into deeper waters (Brazil, West Africa) and more remote areas (Arctic) in their search for oil and gas. As oil companies target deeper and more demanding (harsh environment) regions for their E&P activities, we expect an increase in demand for larger and more technologically advanced offshore support vessels. The accelerating shift from shallow waters to deepwater thus yields favourable market dynamics for owners of modern and high-end offshore support vessels. We believe that continuing growth in demand for high-end specialised vessels will support these vessels and upcoming supply. We also expect relatively higher demand for specialised vessels, as opposed to multipurpose large vessels, which require higher rates to earn decent returns.
Brazil to absorb tonnage internationally on top of its newbuild plan With Brazil’s major discoveries, potential oil and gas reserves offshore Brazil (particularly in more complex deepwater pre-salt basins) are now recognised as some of the largest in the world. Going forward, Brazil is expected be the fastest growing market for deepwater activity. Petrobras has announced a massive newbuild OSV plan, potentially adding 146 OSVs to support its planned E&P activities. The units are expected to be built locally. Also, we
Sector report > Asian Offshore Supply
DnB NOR Markets - 12
17.10.2011
expect Petrobras to absorb tonnage internationally to meet its offshore exploration and development activities.
North Sea spot rates and utilisation AHTS
0%
20%
40%
60%
80%
100%
120%
Dec-
07
Jan-0
8Feb-0
8M
ar-
08
Apr-
08
May-0
8Ju
n-0
8Ju
l-08
Aug-0
8Aug-0
8Sep-0
8O
ct-0
8N
ov-0
8D
ec-
08
Jan-0
9M
ar-
09
Apr-
09
May-0
9Ju
l-09
Aug-0
9Sep-0
9N
ov-0
9D
ec-
09
Feb-1
0M
ar-
10
Apr-
10
Jun-1
0Ju
l-10
Sep-1
0O
ct-1
0D
ec-
10
Jan-1
1M
ar-
11
Apr-
11
Jun-1
1Ju
l-11
Sep-1
1
Utiliza
tion
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Rate
s (G
BP/D
ay)
Utilization (Lag 3 days) Rates
PSV
0%
20%
40%
60%
80%
100%
120%
Dec-
07
Jan-0
8Feb
-08
Mar-
08
Apr-
08
May
-08
Jun-0
8Ju
l-08
Aug
-08
Aug
-08
Sep
-08
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9M
ar-
09
Apr-
09
May
-09
Jul-
09
Aug
-09
Sep
-09
Nov-0
9D
ec-
09
Feb
-10
Mar-
10
Apr-
10
Jun-1
0Ju
l-10
Sep
-10
Oct
-10
Dec-
10
Jan-1
1M
ar-
11
Apr-
11
Jun-1
1Ju
l-11
Sep
-11
Utiliza
tion
0
5000
10000
15000
20000
25000
30000
35000
40000
Rate
s (G
BP/D
ay)
Utilization (Lag 3 days) Rates
Source: Hagland, DnB NOR Markets
Spot rates – AHTS
AHTS 18k+ bhp
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
Jan
Feb
Mar
Apri
l
May
June
July
Aug
Sep
GB
P/
day
2007 (average rates) 2010 (average rates) 2011
AHTS 13-18k bhp
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
Jan
Feb
Mar
Apri
l
May
June
July
Aug
Sep
GB
P/
day
2007 (average rates) 2010 (average rates) 2011
Source: Clarksons, DnB NOR Markets
Spot rates – PSV
PSV <3,000dwt
0
5,000
10,000
15,000
20,000
25,000
30,000
Jan
Feb
Mar
Apri
l
May
June
July
Aug
Sep
GB
P/
day
2007 (average rates) 2010 (average rates) 2011
PSV >4,000dwt
0
5,000
10,000
15,000
20,000
25,000
30,000
Jan
Feb
Mar
Apri
l
May
June
July
Aug
Sep
GB
P/
day
2007 (average rates) 2010 (average rates) 2011
Source: Clarksons, DnB NOR Markets
Sector report > Asian Offshore Supply
DnB NOR Markets - 13
17.10.2011
International dayrates (spot + term fixtures)
AHTS 3000-5999BHP AHTS 6000-9999BHP AHTS 10000-14999 AHTS 15000-17999 AHTS >17999 PSV 2000-2999DWT PSV 3000-3999DWT PSV >4000DWTHigh Low High Low High Low High Low High Low High Low High Low High Low
AHTS 3000-5999BHP AHTS 6000-9999BHP AHTS 10000-14999 AHTS 15000-17999 AHTS >17999 PSV 2000-2999DWT PSV 3000-3999DWT PSV >4000DWTHigh Low High Low High Low High Low High Low High Low High Low High Low
AHTS 3000-5999BHP AHTS 6000-9999BHP AHTS 10000-14999 AHTS 15000-17999 AHTS >17999 PSV 2000-2999DWT PSV 3000-3999DWT PSV >4000DWTHigh Low High Low High Low High Low High Low High Low High Low High Low
Share price performance Although the share prices have recovered somewhat over the past two weeks, we argue that the general underperformance of Asia’s offshore companies is unjustifiable and most have still been overly punished. On average, Asian players (offshore support services, excluding Malaysian names) are down 34% YTD, significantly underperforming the US Oil Service index’s -15%, Norwegian supply peers’ -27% and the general market’s -14%.
The offshore oil service markets in Asia have not functioned much differently from the international markets in terms of activity and growth potential. In fact, we continue to like the Asian markets due to the nature of protectionism in some regions (dominated by NOCs), which require players to have the relationships and networks to operate.
The larger Singapore-listed yards (Keppel, Sembcorp Marine and STX OSV), have not been spared, and are down 15% on average, driven by market expectations of weaker ordering momentum. Likewise, Korean yards are down 30% YTD on stronger outflow in the Korean domestic market.
Performance YTD • Singapore offshore support services players: -34%. • Singapore yards (larger cap): KEP -15% and SMM -28%. • STX OSV: -2%. • Korean yards (HHI, SHI, DSME): -30%. • OSX Index: -15%. • Norwegian players: -27%. • Global supply players: Tidewater -14% and Bourbon -42%. • Malaysia names: SCRES +25% and KEPB +5%. • Singapore benchmark STI: -14%.
Sector report > Asian Offshore Supply
DnB NOR Markets - 14
17.10.2011
Share price performance of OSV players
50
100
150
200
250
300
Jan-0
9
Mar
-09
May
-09
Jul-09
Sep
-09
Nov
-09
Jan-1
0
Mar
-10
May
-10
Jul-10
Sep
-10
Nov
-10
Jan-1
1
Mar
-11
May
-11
Jul-11
Sep
-11
Rebase
d in
dex f
rom
Jan
09
Singapore players Norwegian players Other players (TDW & GBB)
OSX INDEX FSSTI Index
Source: Bloomberg data as of 14 Oct 2011
Share price performance of large-cap yards
50
100
150
200
250
300
350
400
Jan-0
9
Feb-0
9
Mar
-09
Apr-
09
May
-09
Jun-0
9
Jul-09
Aug-0
9
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-1
0
Feb-1
0
Mar
-10
Apr-
10
May
-10
Jun-1
0
Jul-10
Aug-1
0
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-1
1
Feb-1
1
Mar
-11
Apr-
11
May
-11
Jun-1
1
Jul-11
Aug-1
1
Sep
-11
Oct
-11
Rebase
d in
dex f
rom
Jan
0
9
FSSTI Index KOSPI Index Keppel SMM STX OSV SHI DSME HHI
Source: Bloomberg data as of 14 Oct 2011
Sector report > Asian Offshore Supply
DnB NOR Markets - 15
17.10.2011
Performance – 52-weeks high, low, YTD, since August
34,261 24,571 -9,689 -28% Source: DnB NOR Markets, Bloomberg data as of 14 Oct 2011
Funds with firepower when sentiment improves Due to loss aversion, many investors are overweight cash to position them for potential redemptions. We believe that funds’ cash-holding could trigger a spike in buying should sentiment recover, but volatility in share prices can also be expected if this cash is not re-invested.
Relative valuation of offshore support players The recent sell-down has caused a substantial compression of multiples, which we believe is unwarranted given the industry’s fundamentals. Below is an overview of the relative multiples analysis in our Asian coverage.
Company Rec Currency TP Price Upside NAV P/NAV 2011E 2012E 2013E 2011E 2012E 2013EKeppel Singapore 12196 BUY SGD 10.00 8.70 15% 10.14 SGD 0.86 11.7 12.5 12.3 8.1 8.3 7.5Sembcorp Marine Singapore 6293 BUY SGD 4.70 3.86 22% 4.66 SGD 0.83 12.0 12.0 12.1 5.9 5.3 4.9STX OSV Singapore 1041 BUY SGD 1.90 1.12 70% 1.86 SGD 0.60 5.0 5.8 6.3 2.4 2.7 2.6Samsung Heavy InKorea 6884 Not rated KRW NO REC 29500 NA NA NA NA 7.1 7.8 6.8 4.9 5.6 5.1Daewoo ShipbuildinKorea 4687 Not rated KRW NO REC 26000 NA NA NA NA 5.9 7.1 5.9 5.5 6.9 6.2Hyundai Heavy IndKorea 22413 Not rated KRW NO REC 300500 NA NA NA NA 6.1 6.3 5.6 6.1 6.2 5.7Average Asia yards 8.0 8.6 8.2 5.5 5.8 5.3
EV/EBITDA
Country listed
Market cap (USDm)
P/E EV/EBITDA
Country listed
Market cap (USDm)
P/E
Source: DnB NOR Markets, Consensus estimates from Bloomberg for the Korean yards not under coverage as of 14 Oct 2011
Sector report > Asian Offshore Supply
DnB NOR Markets - 16
17.10.2011
Trough valuation – understanding downside exposure Below we show potential trough share prices that could be reached based on our 2012e EPS and trough forward P/E, recorded during the previous down-cycle between 2008 and 2009. For companies that were not listed at that time, we have used the latest trough multiples available.
Source: DnB NOR Markets, 2012e EPS based on our estimates, Trough fwd P/E from Bloomberg during 2008–2011
Note: We have not adjusted one-off items in the earnings between 2008-2011, which could explained the low trough multiple of some of the companies, such as Ezra (which had a USD0.25 EPS, out of USD0.30, associated with one-off gains from listing of EOC)
Note: Jaya’s FY2012e EPS is significant lower than normalised level, due to the reshuffling of vessel sales assumptions to FY2013/FY2014e
Corporate balance sheet is stronger today The offshore cycle took a deep dive in 2009, in line with the global financial crisis. However, given that the downturn lasted for a relatively short period of time, with recovery mode kicking in within two years in 2010, most vessel owners went through the crisis relatively unscathed, which accounts for the lack of distressed opportunities in the market.
Some vessel owners and yards have also built up a relatively strong balance sheet (see table below), supported by the supernormal contracts fixed during the good times. Hence, we believe most of them have the balance sheet strength to ride through current macro uncertainty. In our view, the stronger companies include Keppel, SMM, and STX OSV, with relatively low gearing and capex commitments. We also believe these cash-rich companies would be able to initiate share buybacks and dividends in the event of further weakness in their share prices.
We believe companies that would likely to require additional funding include Otto Marine, Ezra and Swiber, which have relatively high gearing and outstanding capex according to our estimates.
Sector report > Asian Offshore Supply
DnB NOR Markets - 17
17.10.2011
Balance sheet strength
CompanyCountry listed Currency Net debt LT debt ST debt Cash Capex
DnB Forecast for current FYLatest reported financial year
Source: DnB NOR Markets, short-term liquidity is calculated using cash + operating cash flow(before working capital changes) – capex – ST debt (before refinancing)
Expect consolidation in the market, M&A opportunities We expect consolidation to continue in the OSV market. In Asia, vessel owners are fragmented, comprising small players with a limited number of vessels. In order to enhance the competitive advantage of getting into chartering tenders and fleet optimisation, a sizeable fleet is needed. Hence, we expect another phase of consolidation in the market. Companies built up cash piles in the last cycle. Backed by high growth potential and relatively more protected offshore markets in Asia, we believe that a select number of Asian companies are good targets for companies in the US and Europe. In our view, some companies at their current price offer good opportunities for market expansion and make sense synergistically as takeover targets, bringing to the table existing client bases in Asia. For some companies whose shares are trading at a discount to their NAV, the acquirers could get the assets (vessels) at attractive prices. Companies that have a relatively strong cash position and low net debt (i.e. the ability to gear up) are typically in a better position to target or fend off acquisitions.
Financing issue – funding Following discussions with our corporate banking team, we believe the funding situation is getting tighter. Costs in the funding market are increasing due to the challenging USD funding situation. This is of greater significance in the offshore loan market, as most funding is in USD. The current market turmoil has also reduced the availability of liquidity from some banks in Europe. We are not able to quantify the financial impact on the offshore industry due to limited data flow, but in our view this inevitably slows investment decisions and puts pressure on capital funding.
In terms of the impact on Asian yards, we believe the funding situation will result in a slowdown in ordering momentum. We understand that for current new order enquiries, yards are negotiating for progressive payments. We believe it will be more challenging to get funding for new projects on a progressive payment structure, as banks would prefer to finance the remaining unfunded portion of newbuilds already under construction, which come with more attractive pricing and are closer to delivery.
However, we believe the situation is different from 2008 financial crisis, as some of the more aggressive banks have left the sector post 2008 crisis, leaving mainly relationship banks funding the sector. These banks adopt a long-term view and would most likely remain committed to the market.
Sector report > Asian Offshore Supply
DnB NOR Markets - 18
17.10.2011
Reporting quarter Q3 2011 (Sep-end): Ezion, Swiber, KS, Otto Marine, Kreuz, STX OSV, SMM, and Keppel Reporting quarter Q1 FY2012 (Sep-end): ASL, Jaya, and CHO Reporting quarter Q4 FY2011 (Aug-end): Ezra and EOC Reporting quarter Q3 FY2012 (Oct-end): SapuraCrest Reporting quarter Q1 FY2012 (Oct-end): Kencana
Company specifics – quarterly preview focus Based on current macro weakness, we believe most investors would not put too much emphasis on the upcoming quarterly earnings. Hence, we do not think the upcoming earnings release would be major price events for most companies, unless actual earnings deviate significantly from expectations. Focus would rather be on the sustainability of earnings and cash flow.
In this report, apart from the quarterly previews, we have turned our focus on the long-term fundamentals of the companies, which we hope can assist investors to make an informed decision in their investment making process.
For most of small-cap companies, we need a price trigger event to close the divergence between fundamentals and the share prices. For now, the major deterrence to investing in them is liquidity and risk-reward is more attractive among the larger cap companies, given how much they have corrected.
Sector report > Asian Offshore Supply
DnB NOR Markets - 19
17.10.2011
ASL Marine (BUY, TP SGD0.85) Low-risk exposure to Indonesia coal transportation industry ASL Marine offers vertically integrated marine services, engaging in shipbuilding, ship repair and ship chartering. Customers are mainly in Asia Pacific and South Asia. In shipbuilding and ship repair, it owns and operates three shipyards (in Singapore, Indonesia and China), with its key capabilities in Indonesia. In ship chartering, it plans to grow its fleet to 225 vessels (mostly tugs and barges) by 2012. The outlook for the Indonesia coal transportation market remains positive, due to the cabotage ruling where only Indonesian-flagged vessels are allowed to operate in this coal-rich country. This cabotage story is a long-term trigger and we consider ASL to be one of better-positioned players in the coal transportation market.
Divisions • Fleet (ship chartering) (NAV SGD0.91 per share). Owns an existing
fleet of 212 vessels, mainly tugs and barges. It plans to increase the fleet to 225 by 2012.
• Yards (shipbuilding and ship repair) (NAV SGD0.23 per share). Owns and operates three shipyards, in Singapore, Indonesia (Batam) and China (Guangdong). It focuses and specialises in building small, niche vessels. It has a strong track record in building tugs, barges, offshore support vessels (OSVs), work dredger vessels and tankers. The current order book is estimated at SGD265m (see below for details).
Assets • 212 vessels, mainly tugs and barges (see fleet list). • Newbuilds of 13 larger vessels, worth SGD101m, to be added to the
existing fleet. Of these 13, nine (worth SGD98m) are being built internally and we believe comprise 1x pipelay barge, 1x ROV support vessel, 1x 5,000bhp AHTS, 1x 5,000bhp AHT, and 5x tugs.
• Three shipyards – in Singapore, Batam and China.
Recent developments • Yard expansion – addition of two graving docks. • In early October, ASL announced new shipbuilding contracts worth
SGD267m for the construction of five vessels: 2x PSVs, 1x dredger, and 2x barges. On top of this, it also announced SGD159m (USD130m) of shipbuilding contracts (2x emergency stand-by vessels, 9x small-size AHTS, 1x offtake support and supply vessel, 1x work barge) in July.
Expected newsflow • Potential new chartering contracts in the region, with increasing enquiries
from ship-owners. • Further reflagging of tugs and barges to Indonesian flags, targeting the
local coal transportation market, which is protected by cabotage rules. • Potential newbuild and conversions orders from Indonesia, due to the
cabotage laws. • Q1 FY2012 earnings release expected in November.
Valuation Our NAV is SGD0.89 per share. The shares are trading on an EV/EBITDA of 3.6x for 2012e, and a P/E of 4.5x for 2012e. We continue to like ASL for its exposure to the offshore coal transportation market in Indonesia. We reiterate our BUY recommendation and SGD0.85 target price.
Sector report > Asian Offshore Supply
DnB NOR Markets - 20
17.10.2011
Q1 2011/12 preview (September year-end) ASL Marine is expected to report its Q1 2011/12 results in mid-November.
Earnings estimates We forecast Q1 revenues of SGD102m, EBITDA of SGD21m, EBIT of SGD13m, net income of SGD8m, and EPS of SGD0.02. No quarterly consensus is available, but our full-year operating income estimates are above consensus. • We expect relatively stable shipbuilding revenues of SGD52m (51% of
total Q1 revenues) and EBITDA of SGD6m (29% of total Q1 EBITDA), as we expect recent new order wins of SGD426m to recognise income from Q2 onwards, due to the construction schedule.
• For chartering, we expect revenues of SGD20m and EBITDA of SGD8m, driven by utilisation of its 119 barges (c61% versus Q4’s c55%), 64 tugs (c55% versus Q4’s c50%) and fleet of six small handling supply tugs (c76% versus Q4’s c70%).
Healthy yard activity seen during last yard visit in July As mentioned post our yard visit in July, activity was brisk at ASL’s Batam yard (steel cutting, blasting, fabrication engineering, heavy structure assembly, repairs). Its repair berths (we forecast ship repair and conversion Q1 revenues of SGD30m and EBITDA of SGD7m) were operating at close to full capacity, in line with the commercial shipping peak season.
EBITDA breakdownShipbuilding 6 6 5 7 23 6 8 11 11 36 36 31Shiprepair and other marine related services 3 6 2 4 16 7 5 6 8 26 26 24Charter and rental income 8 9 9 9 35 8 10 11 12 41 48 51
EBIT breakdownShipbuilding 3 3 2 3 11 3 5 7 8 24 24 18Shiprepair and other marine related services 3 6 2 4 14 6 5 5 7 23 24 21Charter and rental income 3 4 3 4 14 3 4 5 7 20 27 29 Source: DnB NOR Markets, company Note: Figures adjusted for SG&A expenses and other operating expenses
Shipbuilding order book The current order book of SGD577m is expected to provide revenues and earnings visibility up to Q1 2013/14e.
Sector report > Asian Offshore Supply
DnB NOR Markets - 21
17.10.2011
Current shipbuilding backlog
ASL Shipbuilding Orderbook (units) In unitsOutstanding
values (SGDm)Tugs 8 67
Azimuth Stern Drive Tugs - -Rotor Tugs - -
Barges 7 80OSV - -
AHT - -AHTS 12 240Offshore Construction Vessel - -Offtake Support and Supply Vessel 1 23Emergency Response & Rescue Vessels 2 18Diving support vessel 1 30
Dredgers 3 119Others - tankers 0 0Total 29 577 Source: Company, DnB NOR Markets Note: Some unit breakdowns are based on our assumptions
New order momentum going strong In early October, ASL announced new shipbuilding contracts worth SGD267m for the construction of five vessels: 2x PSVs, 1x dredger, and 2x barges. On top of this, it announced SGD159m (USD130m) of shipbuilding contracts (2x emergency stand-by vessels, 9x small-size AHTS, 1x offtake support and supply vessel, 1x work barge) in Q4 2010/11. ASL has outperformed peers in the region in terms of order intake YTD (calendar).
New order estimate revisions; pace far exceeding expectations The pace of new orders has already exceeded our 2011/12 forecast of SGD247m, as we expected slower ordering momentum in the current weak macro market. As a result, we have raised our new order estimates and earnings estimates (see below).
New order estimate revisions New assumptionsIn SGDm FY2006 FY2007FY2008 FY2009 FY2010 FY2011* FY2012 YTD FY2012E FY2013E FY2014ENewbuild orders** (historical and secured) 250 467 315 100 39 260 267 267 na naOffshore support and specialised vessels na na na na na -39 117 153 72 108Tugs na na na na na 23 20 50 50Dredgers na na na na na 40 77 77 30 60Others - Tankers/ barges na na na na na -4 73 106 45 60Conversions (under Shiprepair segment) na na na na na 30 60 60 90Total full-year estimated orders (incl conversions) 255 416 257 368
Initial assumptionsIn SGDm FY2006 FY2007FY2008 FY2009 FY2010 FY2011* FY2012E FY2013E FY2014ENewbuild orders** (historical and secured) 250 467 315 100 39 260 267 na naOffshore support and specialised vessels na na na na na -39 72 72 108Tugs na na na na na 23 40 50 50Dredgers na na na na na 40 30 30 60Others - Tankers/ barges na na na na na -4 45 45 45Conversions (under Shiprepair segment) na na na na na 30 60 60 90Total full-year estimated orders (incl conversions) 255 247 257 353 Source: Company, DnB NOR Markets Note: *As mentioned previously, we include the SGD131m of orders secured in July 2011 in 2010/11 Note: **Derived using reported closing order book + revenues reported – the reported opening order book
Source: DnB NOR Markets, Bloomberg consensus as of 12 October
Sector report > Asian Offshore Supply
DnB NOR Markets - 22
17.10.2011
Valuation and recommendation The long-term fundamentals of ASL’s chartering business remain positive, with relatively good margins (2011/12e EBITDA margin 39%), riding on healthy demand for its tug and barge fleet in the Indonesian coal transportation market. For shipbuilding, new order flow is still the key driver, and new order flow has so far exceeded our expectation, with SGD267m of new shipbuilding contracts secured in October. This supports our view that offshore activity remains robust and ASL is well positioned for new orders, due to its: 1) stable and established management, with strong client and supplier relationships; 2) competitive pricing; and 3) good project execution and track record of meeting clients’ demands. The SGD577m shipbuilding order book is expected to provide revenue coverage in 2011/12e and 2012/13e, with margins (execution) the swing factor.
We have raised our NAV from SGD0.84 to SGD0.89 per share after revising our shipbuilding new order and earnings estimates. We value the yard business at an EV/EBITDA of 3x 2011/12e and 2012/13e. We reiterate our BUY recommendation and NAV-based target price of SGD0.85
Fleet NAV – SGD0.84/share
NAV Calculation
Fleet size
(unit) Avg size
Vessel avg age
Avg contract length (mths)
Value per
vessel (USDm)
X rate (USD/SGD)
Value per
vessel (SGDm)
Total value
(SGDm)
Total value/
sh (SGD)
% of total NAV
Fleet value of Tugs 64 2,000 bhp 4.0 3.0 1.5 1.27 1.9 122 0.29 33%Fleet value of Barges 119 300 x 250ft 4.0 3.0 0.8 1.27 1.0 124 0.29 33%Fleet value of OSV 6 5,000 bhp 1.5 3.0 15 1.27 18.4 110 0.26 30%Fleet value of Tanker 2 1,000 dwt 1.0 3.0 11.0 1.27 14.0 28 0.07 7%Fleet value of tugs and barges (Koon) 21 - - - 0.4 1.27 0.4 9 0.02 2%Total fleet value - - - - - - - 384 0.91 103%NAV of yards (3x average FY2012e and FY2013e EV/EBITDA) - 170,000 dwt - - - - - 122 0.29 33%Other financial assets - - - - - - - 22 0.05 6%Total asset values 212 - - - - - - 529 1.25 141%NIBD incl future capex (2012E) - - - - - - - 154 0.37 41%Equity value (SGDm) - - - - - - - 374 0.89 100%No of shares outstanding - - - - - - - 422 - -NAV per share 0.89 100% Source: DnB NOR Markets
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
ASL Marine
Rebased price (12m, SGD)
60
80
100
120
140
160
180
200
220
240
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
ASL Marine
Rebased consensus average forward EPS (12m, SGD)
0
100
200
300
400
500
600
2008 2009 2010 2011 2012e 2013e 2014e-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Revenue (SGDm) Revenue Growth
Revenue GrowthRevenue (SGDm)
0.00
0.05
0.10
0.15
0.20
0.25
2008 2009 2010 2011 2012e 2013e 2014e0.000
0.005
0.010
0.015
0.020
0.025
0.030
0.035
0.040
0.045
EPS (SGD) DPS (SGD)
DPS (SGD)EPS (SGD)
0
20
40
60
80
100
120
2008 2009 2010 2011 2012e 2013e 2014e16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
23.0%
EBITDA (SGDm) EBITDA margin
EBITDA marginEBITDA (SGDm)
-80-60-40-20
020406080
100120
2008 2009 2010 2011 2012e 2013e 2014e0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
FCF (SGDm) Dividend yield
Dividend yieldFCF (SGDm)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2008 2009 2010 2011 2012e 2013e 2014e0%
5%
10%
15%
20%
25%
30%
35%
Price/Book ROE
ROEPrice/Book
Sector report > Asian Offshore Supply
DnB NOR Markets - 25
17.10.2011
CH Offshore (BUY, TP SGD0.65) AHTS rates are key earnings driver CH Offshore (CHO) is an offshore support player, providing chartering services through its fleet of AHTS vessels to the offshore oil & gas industry. It has a business presence in South East Asia, Australia and the Middle East. As a pure AHTS vessel owner, dayrates are the key earnings driver. Most of its vessels are on term charters (6–12 months), providing good earnings visibility over the next few quarters. We reiterate our BUY recommendation and SGD0.65 target price.
Divisions • Marine services. Charters and manages a fleet of AHTS, with an average
age of 4–5 years.
Assets • Fleet of 17x AHTS, with 7x mid-size 12,240bhp, 2x 4,800bhp, and 8x
5,000+bhp.
Fleet list Vessel name Type BHP Built Status Country Client Yard built OwnershipBeryl AHTS 4800 2005 Spot market Indonesia Spot China - Fujian Mawei 100%Amber AHTS 4800 2005 Operating Indonesia Total China - Fujian Mawei 100%Zircon AHTS 5000 2004 Operating Malaysia Shell Singapore - Keppel Singmarine 100%Jasper AHTS 5000 2004 Operating United Arab Emirates Adma-Opco Singapore - Keppel Singmarine 100%Temasek Seppingan AHTS 5400 2001 Operating Indonesia Chevron Singapore - Pan United 49%Temasek Attaka AHTS 5400 2001 Operating Indonesia Chevron Singapore - Pan United 49%Garnet AHTS 5400 2005 Operating United Arab Emirates Adma-Opco Malaysia - Piasau slipway 100%Topaz AHTS 5400 2005 Operating United Arab Emirates Adma-Opco Malaysia - Piasau slipway 100%Peridot AHTS 12240 2009 Operating Brazil Petrobras Japan - Universal 100%Aquamarine AHTS 12240 2010 Spot market Vietnam Spot Japan - Universal 100%Amethyst AHTS 12240 2008 Operating Venezuela PDVSA Japan - Universal Shipyards 100%Turquoise AHTS 12240 2008 Operating Venezuela PDVSA Japan - Keihin, Yokahama 100%Tourmaline AHTS 12240 2007 Operating Australia Esso Japan - Universal Shipyards 100%Coral AHTS 12240 2008 Operating Australia Esso Japan - Universal Shipyard 100%Pearl AHTS 12240 2008 Operating Singapore - Japan - Universal Shipyards 100%Co-owned with Scomi AHTS 5400 2002 Operating Malaysia - - 49%Co-owned with Scomi AHTS 5400 2002 Operating Malaysia - - 49% Source: ODS, DnB NOR Markets
Recent developments • Alongside the implementation of the Indonesian Azaz Cabotage regulation,
CH Offshore has extended its planned sale of vessels to its Indonesian JV, PT Bahtera Nusantara Indonesia. In March, it announced that it intended to sell one more AHTS of 12,240bhp (either the Tourmaline, the Coral, or the Peridot) to the entity, to continue its chartering activities in Indonesia. To date, it has sold two vessels to PT Bahtera Nusantara Indonesia, the Temasek Attaka and the Amber.
• Following the cancellation of the planned sale of the 12,240bhp AHTS, Pearl to PT Bahtera Nusantara Indonesia in January 2011, the company announced in February that it had secured a 1+6-year bareboat charter contract on Pearl with a third-party buyer. It is fixed at a dayrate of USD10,750 for the term of the contract and includes an option to purchase the vessel at USD16m at the end of the extended charter period.
Expected newsflow • 2011/12 results, which are due out in mid-November. • Update on the vessels set to move to the Indonesian entity, including: 1)
additional vessels for sale to the JV; and 2) news on whether the Indonesian partner, PT Bahtera Niaga Internasional, has secured contracts for the vessel intended for injection into the JV.
• Update on the vessels put to work in Australia. • Possible fleet expansion.
Valuation Our NAV is SGD0.66 per share. We reiterate our BUY recommendation and SGD0.65 target price.
Sector report > Asian Offshore Supply
DnB NOR Markets - 26
17.10.2011
Q1 2011/12 preview (September end) CH Offshore is expected to report its Q1 2011/12 results in mid-November.
No major development expected We expect no major development in the Q3 report, as the majority of the fleet is backed by long-term charters. We expect Q1 revenues of USD15m, EBITDA of USD9m, EBIT of USD8m, and net income of USD8m.
Operating revenues 13.4 15.0 na 1.7 12% 66 70 73EBITDA 9.7 9.4 na -0.4 -4% 43 47 50EBITDA margins 73% 62% 65% 67% 68%EBIT 7.8 7.6 na -0.2 -3% 33 38 40Net finance 0.0 0.0 na 0.0 - 0 0 0Pretax earnings 7.8 7.6 na -0.2 -3% 36 40 43One-off gain on vessel disposal 1.0 -Net result 9.0 7.6 na -1.4 -15% 36 40 43
EPS 0.013 0.011 na 0.0 -15% 0.051 0.057 0.060
Full-year figures (DnB NOR)
Source: DnB NOR Markets, company
Dayrates are the key swing factor CHO is a pure AHTS player and dayrates (term+spot) are its key earnings driver. We believe dayrates will recover to USD1.47/bhp, from Q4 2010/11’s implied USD1.32/bhp, as we expect the return of docked vessels in Q1.
Strong cash position for fleet expansion and/or acquisitions With zero debt and Q4 cash of USD43m, CHO has the capacity to re-gear its balance sheet for fleet expansion and/or acquisitions. With vessel prices and activity expected to trend up, we see upside potential should CHO decide to expand its fleet now.
Potential M&A target As CHO is trading at a steep discount to NAV, we argue that it could be an attractive takeover target for players wanting pure exposure in their AHTS fleet. We believe the key obstacle would be key shareholder Falcon, which bought its 29% stake in CHO at the higher price of SGD0.7 in February 2010.
Sector report > Asian Offshore Supply
DnB NOR Markets - 27
17.10.2011
Valuation and recommendation Our NAV is SGD0.66 per share. We reiterate our BUY recommendation and SGD0.65 target price.
Fleet NAV – SGD0.66 per share
Vessel name Type BHP Built Status Country Client Yard built OwnershipNAV
(USDm)Ex
rateNAV
(SGDm)Beryl AHTS 4800 2005 Spot market Indonesia Spot China - Fujian Mawei 100% 11 1.24 14Amber AHTS 4800 2005 Operating Indonesia Total China - Fujian Mawei 100% 10 1.24 12Zircon AHTS 5000 2004 Operating Malaysia Shell Singapore - Keppel Singmarine 100% 13 1.24 16Jasper AHTS 5000 2004 Operating United Arab Emirates Adma-Opco Singapore - Keppel Singmarine 100% 13 1.24 16Temasek Seppingan AHTS 5400 2001 Operating Indonesia Chevron Singapore - Pan United 49% 10 1.24 6Temasek Attaka AHTS 5400 2001 Operating Indonesia Chevron Singapore - Pan United 49% 10 1.24 6Garnet AHTS 5400 2005 Operating United Arab Emirates Adma-Opco Malaysia - Piasau slipway 100% 13 1.24 16Topaz AHTS 5400 2005 Operating United Arab Emirates Adma-Opco Malaysia - Piasau slipway 100% 13 1.24 16Peridot AHTS 12240 2009 Operating Brazil Petrobras Japan - Universal 100% 33 1.24 40Aquamarine AHTS 12240 2010 Spot market Vietnam Spot Japan - Universal 100% 35 1.24 43Amethyst AHTS 12240 2008 Operating Venezuela PDVSA Japan - Universal Shipyards 100% 35 1.24 43Turquoise AHTS 12240 2008 Operating Venezuela PDVSA Japan - Keihin, Yokahama 100% 35 1.24 43Tourmaline AHTS 12240 2007 Operating Australia Esso Japan - Universal Shipyards 100% 29 1.24 36Coral AHTS 12240 2008 Operating Australia Esso Japan - Universal Shipyard 100% 30 1.24 37Pearl AHTS 12240 2008 Operating Singapore - Japan - Universal Shipyards 100% 30 1.24 37Co-owned with Scomi AHTS 5400 2002 Operating Malaysia - - 49% 6 1.24 7Co-owned with Scomi AHTS 5400 2002 Operating Malaysia - - 49% 6 1.24 7
NAV Calculation SGDm Method 30NAV of own chartering fleet 382 Fair mkt value 32.5NAV of co-fleet 7 Fair mkt value, assuming 50% debt 29Total assets 389 91.52012E NIBD + future capex -77 91.5NAV of all assets 466 1No of outstanding shares 705 0Equity value per share (SGD) 0.66 Source: DnB NOR Markets
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
CH Offshore
Rebased price (12m, SGD)
75
80
85
90
95
100
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
CH Offshore
Rebased consensus average forward EPS (12m, USD)
0
10
20
30
40
50
60
70
80
2008 2009 2010 2011 2012e 2013e 2014e-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Revenue (USDm) Revenue Growth
Revenue GrowthRevenue (USDm)
0.000
0.010
0.020
0.030
0.040
0.050
0.060
0.070
0.080
0.090
2008 2009 2010 2011 2012e 2013e 2014e0.000
0.005
0.010
0.015
0.020
0.025
EPS (USD) DPS (USD)
DPS (USD)EPS (USD)
0
10
20
30
40
50
60
2008 2009 2010 2011 2012e 2013e 2014e0%
10%
20%
30%
40%
50%
60%
70%
80%
EBITDA (USDm) EBITDA margin
EBITDA marginEBITDA (USDm)
-20
-10
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012e 2013e 2014e0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
FCF (USDm) Dividend yield
Dividend yieldFCF (USDm)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2008 2009 2010 2011 2012e 2013e 2014e0%
5%
10%
15%
20%
25%
30%
35%
40%
Price/Book ROE
ROEPrice/Book
Sector report > Asian Offshore Supply
DnB NOR Markets - 30
17.10.2011
EOC Limited (HOLD, TP NOK7) A play on the production phase of O&G cycle Oslo-listed EOC is the sister company of Singapore-listed Ezra Holdings (which owns 49% of EOC). It owns and operates one FPSO under contract off Thailand, one new FPSO contract (with partners) off Vietnam, and three heavylift accommodation barges. EOC primarily operates in the Asia Pacific region in two focused divisions (FPSO and construction support).
Divisions • FPSO segment. Operates and manages FPSO projects in Asia. • Offshore construction support segment. Provides offshore
construction, accommodation, pipelaying, heavylift, transportation and installation services through its three construction vessels.
Assets • 1x gas FPSO Arunothai off Thailand. • 1x newbuild FPSO Lewek Emas (with partners) off Vietnam, commencing
operation in Oct 2011. • 3x heavylift accommodation barges.
Recent developments • Vietnam FPSO update. Expected to commence 6+6-year charter in Oct
2011. Ezra’s stake is estimated at 41% and contributions will be equity accounted (including management fees; EOC owns 50% of the JV that operates the vessel). On a full ownership basis, the contract is estimated to contribute yearly revenue of USD82m and EBITDA of USD60m (10% IRR assumption).
• Targeting offshore windfarm market. Exploring new opportunities in providing offshore support services to the windfarm installation market in Asia. It intends to explore opportunities (still in an early stage), leveraging on its existing fleet of construction barges, likely to be Lewek Champion or Chancellor.
• Q4 2010/11 results due out at the end of October.
Expected newsflow • FPSO contract tenders in West Africa and Asia. • Longer-term, management is targeting at least one FPSO project every
12–18 months to achieve growth. • Potential contract for construction barge Lewek Champion. • Potential windfarm initiatives. • Potential dual listing in Singapore.
Valuation Going forward, focus is likely to be on potential FPSO projects to drive growth, which are not discounted in the current share price. With limited near-term catalysts, we reiterate our HOLD recommendation and NOK7 price target; our NAV is NOK6.72.
Sector report > Asian Offshore Supply
DnB NOR Markets - 31
17.10.2011
Fleet working status • FPSO Arunothai – on 3+2-year
charter with PTTEP off Thailand at cUSD228k/day. Firm charter ends in October 2012 (2012/13)
• Lewek Champion – on USD45m offshore pipe-laying and platform installation contract with Chevron off Thailand since late February 2011. This kept it busy until August 2011 (2010/11). Average dayrate of cUSD250,000; we forecast higher operating expenses (due to project-based element) at USD170,000/day
• Lewek Chancellor – on extended charter off Thailand, at rate of cUSD23k/day, and looking at 1-year term charter opportunity off India
• Lewek Conqueror – on term charter, ending March 2014, contract off Brunei at USD25k/day
• Under construction FPSO for Vietnam – expected to commence 6+6-year charter in early Oct. Ezra’s stake is estimated at 41% and contributions will be equity accounted (including management fees, which EOC owns 50% of the JV that operates the vessel). On a full ownership basis, contract is estimated to contribute yearly revenue of USD82m and EBITDA of USD60m (10% IRR assumption)
Q4 2010/11 preview (August year-end) EOC is expected to report its Q4 2010/11 results at the end of October.
We are above consensus Key focus will be on the contract status of the key construction barge Lewek Champion (believed to be docking at a yard in Malaysia) and potential dual-listing status, and the potential FPSO tenders (not discounted in our model).
We expect Q4 revenues of USD46m (consensus USD40m), EBITDA of USD20m (consensus USD17m), EBIT of USD14m (consensus of USD10m), net income of USD10m (consensus of USD8m) and EPS of USD0.093 (consensus USD0.077).
Contracting status of Lewek Champion We believe Lewek Champion has completed its contract with Chevron off Thailand. And based on the vessel search function in Bloomberg, it is at a dock in Malaysia Johor. We model the vessel to earn an average dayrate of USD140k with an operating cost of USD70k/day (EBITDA USD23m) for 2011/12e. We see a downside risk to our Q1 2011/12e (September–November) earnings if the vessel has no job during this period.
Vietnam FPSO project – start-up later than expected EOC owns a 41% equity stake in this FPSO project, with Ezra owning 37%, Keppel’s KSI 20%, and Vietnamese partner PVT the remaining 2%. The total cost of the FPSO is expected to be cUSD405m, with equity funding of USD178m and debt funding of cUSD227m.
The start-up date of the FPSO Lewek EMAS off Vietnam was later than expected. As earlier stated, we had initially expect the first oil in end mid-July (Q4 FY20112e), compared to the actual first oil yesterday, 10 Oct (Q1 FY2012e). Notably, delays in FPSO projects are common in this industry, due to the project execution risks in installation, hookup, commissioning and testing.
Going forward, we are modelling the FPSO based on these assumptions: • Revenue dayrate of USD244,000 (based on contract announcement); • Operating expense of USD60k/day (based on 10% IRR); • Straight-line depreciation over 25 years; • Interest cost of 7.5% on an initial loan funding of cUSD227m; • Tax rate of 25% (Vietnam’s corporate tax rate); and • Management fees (EOC is believed to own a 50% stake in the entity
operating the FPSO) of 5% dayrate.
Impact on earnings We are modeling the FPSO to contribute USD1.7m of share of associate income per month from mid-July for 6+6 years (length of the contract).
Sector report > Asian Offshore Supply
DnB NOR Markets - 32
17.10.2011
Hence with the shortfall of approx 2.8 months against our expectation, the impact on EPS is -10% in FY2011e and -4% in FY2012e.
Consensus estimatesChangeNew estimates Old estimates
Source: DnB NOR Markets
Balance sheet position Following the Q3 results, we see a slight improvement in the balance sheet, with debt at USD399m (USD402m in Q2), cash of USD85m (USD78m in Q2), restricted cash of USD74m (USD74m) and net debt of USD314m (USD324m).
Potential dual listing in Asia not a near-term trigger As mentioned previously, we believe EOC is likely to achieve a dual listing in Singapore. We believe this would be viewed positively in the market as investor interest is strong in Asia, EOC’s operating base. However, given the current capital market conditions, the listing process might be delayed.
Valuation and recommendation Our NAV is NOK7.29 per share. In our view, the forward multiples look attractive, partly due to high leverage. The estimates are expected to be lower as we expect earnings to decline from 2011/12e, as the key FPSO Lewek Arunothai will be earnings based on a step-down rate. We reiterate our HOLD recommendation, with a price target of NOK7.
NAV of NOK6.72/share
Vessel Type BuiltCost
(USDm)Net debt (USDm)
Equity value
(USDm)
Current equity implied value (USDm)
Implied value
(USDm)
PV of vessel's
FCF
Net Asset Value
(USDm)
NAV adjusted for debt (USDm)
NAV/ share (USD)
A B C=A-B D E=D+B F G H=G-B ILew ek Conquerer Accomm Construction Barge 2004 26 17 9 6 23 31 27 10 0.09Lew ek Chancellor Accomm Construction Barge 2007 26 17 9 6 23 30 27 10 0.09Lew ek Champion Accomm Pipe Lay Barge 2007 120 78 42 29 106 131 145 67 0.61Lew ek Arunothai Gas FPSO 2008 322 209 113 77 285 268 250 41 0.37Total 100% owned vessels 493 320 173 117 437 461 449 129 1.16Chim Sao FPSO Lew ek EMAS @ 41% stake Oil FPSO 2011 62 62 - - - 9 70 9 0.08Total 138 1.24NAV per share (NOK @ USDNOK5.86) 7.29
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
EOC Limited
Rebased price (12m, NOK)
65
70
75
80
85
90
95
100
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
EOC Limited
Rebased consensus average forward EPS (12m, USD)
0
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010 2011e 2012e 2013e-50%
0%
50%
100%
150%
200%
250%
300%
Revenue (USDm) Revenue Growth
Revenue GrowthRevenue (USDm)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
2007 2008 2009 2010 2011e 2012e 2013e0.000
0.005
0.010
0.015
0.020
0.025
EPS (USD) DPS (USD)
DPS (USD)EPS (USD)
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011e 2012e 2013e0%
10%
20%
30%
40%
50%
60%
EBITDA (USDm) EBITDA margin
EBITDA marginEBITDA (USDm)
-200
-150
-100
-50
0
50
2007 2008 2009 2010 2011e 2012e 2013e0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
FCF (USDm) Dividend yield
Dividend yieldFCF (USDm)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2007 2008 2009 2010 2011e 2012e 2013e0%
5%
10%
15%
20%
25%
30%
Price/Book ROE
ROEPrice/Book
Sector report > Asian Offshore Supply
DnB NOR Markets - 35
17.10.2011
Ezion Holdings (BUY, TP SGD0.90) Growth engines in liftboats and offshore Australia Ezion develops, owns and charters offshore vessels to clients in the offshore oil & gas industry. It has one of the largest fleets of ballastable vessels used in the commissioning and decommissioning of offshore platforms. We base our investment case on: 1) the liftboats market in Asia/Middle East; and 2) key project initiatives (two marine supply base developments in Australia, positioning Ezion for upcoming marine tenders to support major LNG developments including Gorgon, Wheatstone, Greater Sunrise, off Northern Territory and Western Australia). A key risk (upside and downside) is market demand for liftboats and asset pricing, as Ezion intends to expand its current fleet using capital from sale & leasebacks on existing liftboats.
Divisions • Offshore marine logistic & support services. Fleet of 29 vessels (nine
ballastable vessels, six barges, six tugs) operating in the region, and eight newbuild vessels (tugs and barges) for the Gorgon project.
• 5x self-propelled jack-up liftboats to provide construction, support, and maintenance services for offshore fixed platforms.
• Marine services. Ad-hoc project-based service support contracts.
Assets • Offshore oil & gas support vessels – nine ballastable, six tugs, six barges,
eight tugs and barges for Gorgon project. • 5x self-propelled jack-up liftboats, consisting of 1x liftboat Lewek Leader
on charter to Ezra and 3x units (including 1x newbuild due delivery in Q1 2011/12) backed by term charters, and 1x newbuild (delivery due Q1 2011/12) liftboat targeting at offshore windfarm market.
• 1x 2,000dwt PSV.
Recent developments • Secured a 2+2 USD73m contract in June to convert an old jack-up to an
accommodation rig with JV partner Treatmill for a term charter off North Sea.
• Secured a 5-year USD110m jack-up drilling and production support contract with the JV partner Buccaneer Energy off Alaska in April.
• New marine logistics and support contract of USD55m (for c16 months), secured in August, off Curtis Island, Queensland to support the LNG development in the region.
• Proposed issuance of SGD-denominated perpetual capital securities.
Expected newsflow • Start-up date for the two marine supply bases in Western Australia and
Northern Territory. • Potential offshore marine contracts for the LNG developments off
Australia. Ezion is also targeting offshore support services. • Further newbuild liftboat plan, funding likely come from sale & leaseback. • Q3 results, which are due out in mid-November.
Valuation Our NAV is SGD 0.94 per share. We forecast an adjusted 3-year EPS CAGR of 41% (2010–2013e). The growth engine drivers are the enlarged liftboat fleet, marine supply bases in Australia, and further offshore marine support contracts in Australia. We argue that the market has not fully priced in the base-case growth scenario. Ezion is an attractive ‘GARP’ (growth at reasonable price) stock, commanding a 2012e PEG of 0.12, supported by good fleet contract coverage, ROE-accretive projects (drilling contract in Alaska, marine supply bases in Australia, accommodation contract in the North Sea), and NAV of its assets (liftboats, vessels). We reiterate our BUY recommendation and our SGD0.90 DCF- and NAV-based price target.
Sector report > Asian Offshore Supply
DnB NOR Markets - 36
17.10.2011
Note: Ezion changed its reporting currency from SGD to USD on 1 January 2011. We have therefore converted its Q3 figures to an SGD-equivalent based on an average Q3 USD-SGD rate of 1.226 for comparison against historical numbers
Q3 preview Ezion is expected to report its Q3 results in mid-November.
Recent contract wins On 8 August Ezion announced it had secured a logistics and support services contract worth USD55m off Curtis Island, Queensland, Australia. This is Ezion’s first step into Eastern Australia and the client is believed to be Bechtel. We believe this will open doors to future contracts in the region and that Ezion’s execution (gaining goodwill with the client) is likely to be key.
Q3e supported by chartering and liftboat fleet We forecast Q3 revenues of SGD44m (USD36m), EBITDA of SGD22m (USD18m), EBIT of SGD18m (USD15m), net income of SGD17m (USD14m) and EPS of SGD0.023 (USD0.019). We expect 14% EPS growth in Q3 QOQ, primarily from a full contribution from Liftboat Teras Conquest 4.
Q3 preview SGDm Q2/10 Q3/11E Q3/11E Chg y/y % Chg
Reported DnB NOR Cons* 2011E 2012E 2013E
Operating revenues 32.6 44.3 na 12 36% 156 254 311EBITDA 16.1 22.3 na 6 38% 78 125 158
EBIT 13.4 18.1 na 5 35% 64 96 126Net f inance -0.1 -2.1 na -2 3104% -5 -7 -6Pretax earnings 16.5 18.9 na 2 14% 86 111 141Net result 15.1 17.2 na 2 na 80 91 115One-off gains on disposal 0.0 0.0 na 0 na 0 0 0Adjusted net result 15.1 17.2 na 2 13% 80 91 115EPS 0.020 0.023 na 0.00 13% 0.11 0.12 0.145Adjusted EPS 0.020 0.023 na 0.00 13% 0.11 0.12 0.145
Full-year figures (DnB NOR)
Source: Company, DnB NOR Markets
Note that Ezion does not provide quarterly breakdowns, only full-year, for the chartering and OSV services segment (including the liftboats) and the marine services segment.
Revisiting the working status of liftboat fleet Liftboat StatusTeras Conquest 1 (Lewek Leader) Sold 51%, Ezion continues to own the operating rights, the unit is on bareboat charter to EzraTeras Conquest 2 Sold 100% for USD78m in April 2010 to a Middle Eastern client, with gains recorded in Q12011Teras Conquest 3 (Lewek Lifter) Currently working off Abu Dhabi on bareboat with the same Middle Eastern clientTeras Conquest 4 Believed to be working off West Africa in June onwardsTeras Conquest 5 Newbuild ready in Q12012, targeting renewable energy - windfarm maintenance marketTeras Conquest 6 Newbuild ready in Q12012, already backed by 3+2-year time charter LOI Source: Company, DnB NOR Markets,
Key rate forecasts for liftboat fleet Remarks
2010E 2011E 2012E 2013E 2010E 2011E 2012E 2013ELiftboat 1 3+1 Q12010 66,160 66,160 66,160 66,160 42,000 56,000 56,000 56,000 49% owned by EZI but is still chartering the boat to EzraLiftboat 2 Sold Sold 66,160 66,160 66,160 66,160 0 0 0 0 SoldLiftboat 3 3+2 Q42010 69,801 69,801 69,801 69,801 0 0 0 0 Bareboat off Middle EastLiftboat 4 LOI Q22011e - 66,000 66,000 66,000 0 0 0 0 Bareboat with US supermajorLiftboat 5 Available Q22012e - - 55,000 55,000 - 20,000 20,000 Looking at North Sea windfarm maintainance (time charter)Liftboat 6 LOI - 3+2 Q12012e - - 79,000 79,000 - 25,000 25,000 LOI with the Middle Eastern company
EBIT marginsOffshore logistics support services 28% 30% 35% 31% 32% 35% 27% 31% 31% 30% 33% 33%Marine services (project-based) 20% 20% 7% 2% 11% - - 15% 15% 15% 15% 15%Self-propelled jack-up liftboat 80% 4% 4% 40% 28% 55% 55% 65% 65% 61% 51% 57%Marine supply base projects - - - - - - - 0% 27% 3% 20% 22% Source: DnB NOR Markets, company Note: Quarterly breakdowns are not provided by company; values based on our assumptions and estimates
No quarterly consensus available; we are above on full-year numbers No quarterly consensus is available. However, on an annual basis, we are above consensus on 2010/11e revenues, EBITDA, EBIT, net profit and EPS (in the latter case, by 12%), but below on EBITDA margins.
Our full-year estimates versus consensus (in USDm) USDSGD conversion rate 1.24 1.24 1.24 1.24 1.24 1.24USDm
Proposed issue of SGD-denominated perpetual capital securities In early August Ezion announced it was looking to raise capital by issuing SGD-denominated perpetual capital securities. We believe it is a hybrid preference share issue, with Ezion expected to pay ‘dividends’ to investors of this security. Hence, we assume it will not be booked under debt, but rather as equity in the balance sheet, i.e. without affecting EPS. The ‘dividends’ would reduce free cash flow available to existing shareholders. And for the perpetual term, we would interpret it as a long-term instrument, which Ezion may have call options in a certain period on the security.
The rationale is to raise funding for planned capex, with outstanding capex mainly in the two remaining newbuild liftboats, and vessels for Gorgon.
We have yet to factor the issue into our model, awaiting further details (size, cost, function, structure, etc). With little information available and the recent weak capital markets, we expect the issue to be delayed.
Sector report > Asian Offshore Supply
DnB NOR Markets - 38
17.10.2011
Note: Ezion changed its reporting currency from SGD to USD on 1 January 2011. We have therefore converted its Q3 figures to an SGD-equivalent based on an average Q3 USD-SGD rate of 1.226 for comparison against historical numbers
Valuation and recommendation We still believe Ezion is in a strong position to ride the growth in LNG in Australia. The recent new USD55m marine services contract off Curtis Island is testament to this. We consider Ezion’s good geographical reach in key oil & gas developments in Australia as a key competitive advantage. We argue that its positioning of marine supply bases in Exmouth (Western Australia) and Melville Island (Northern Territory), track record, and experience in marine contracts in Queensland (Curtis) and Gorgon project, give it a competitive advantage (learning curve, client relationships, know-how) in securing new contracts in Australia.
We reiterate our belief that Ezion is an attractive ‘GARP’ (growth at reasonable price) stock, commanding a 2012e PEG of 0.12, supported by good fleet contract coverage, ROE-accretive projects (drilling contract in Alaska, marine supply bases in Australia, accommodation contract in the North Sea), and NAV of its assets (liftboats, vessels). Also, based on its track record, we are positive on management’s ability to find new projects that add shareholder value.
Our NAV is SGD0.94 per share. We reiterate our BUY recommendation, with a NAV-based target price of SGD0.90.
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Sector report > Asian Offshore Supply
DnB NOR Markets - 41
17.10.2011
EZRA Holdings (upgrade to BUY, TP SGD1.20) Next driver – deepwater subsea Ezra is an integrated offshore support, subsea and marine services provider, focused on supporting clients in the entire oilfield lifecycle with its fleet of young and sophisticated offshore vessels. Coupled with its broad expertise, it provides clients with efficient and effective services, catering to their every need.
Divisions • Offshore Support Services. Manages a mixed fleet of AHTS, AHT and
crewboats. The average term charter is 2–3 years. • Marine Services (yard). Provides services such as marine supplies,
fabrication, engineering and design work to the same set of clients as serviced by Ezra’s OSV division. Ezra is looking to utilise the yard to service its own fleet long-term.
• Subsea services. Provides integrated services for the deepwater subsea market, including installing subsea equipment, umbilicals, risers and flowlines; subsea inspection, maintenance and repair; shallow-water well intervention, well simulation, hydraulic workover, and coil tubing services. The integration with recent acquisition AMC will see Emas-AMC utilising the fleet of subsea capable vessels: 1x deepwater construction vessel Lewek Crusader, 1x MFSV, 3x subsea construction vessels (including two Boa vessels), 1x newbuild construction vessel Aker Connector and 1x newbuild ice-class construction vessel Lewek Constellation.
• FPSO and barges. Ezra holds 49% of EOC, listed in Norway. We use a marked-to-market valuation for EOC.
Assets • 44 vessels, comprising mainly offshore support vessels (see fleet list). • Fabrication yard in Vietnam.
Recent developments • Integration of Aker Solutions’ subsea unit Aker Marine Contractor (AMC). • In April, Ezra announced cUSD120m of new subsea contracts, taking the
order book to USD254m. It is targeting USD1bn over the next 12–18 months.
• Ezra announced in mid-August that its subsidiary EMAS AMC had secured a 3+2-year contract for the installation of wellhead platforms and associated pipelines in the Gulf of Thailand from Chevron Thailand worth cUSD300m.
Expected newsflow • Potential contracts on the upcoming newbuild PSVs and the MFSV Lewek
Fulmar. • Potential SURF/EPIC contract wins in the coming quarters; Ezra is
targeting to lift its subsea backlog to USD1bn.
Valuation We have lowered our NAV from SGD1.43 to SGD1.32 on the fleet update and lower valuation on the MFSV Lewek Fulmar, which is expected to remain a supply vessel rather than be upgraded to become a subsea vessel. Based on this, we have upgraded Ezra from HOLD to BUY, with a target price of SGD1.20 (10% discount to NAV). We believe this discount is warranted, due to the business risks (project execution, complexity in project management, tendering, track record as combined EMAS-AMC entity) in the subsea segment, which is company-specific, rather than asset-specific.
Sector report > Asian Offshore Supply
DnB NOR Markets - 42
17.10.2011
Q4 2010/11 preview (August year-end) Weak earnings expected – we are 41% below consensus We expect focus in the results to remain on subsea and the funding of outstanding capex. We forecast revenues of USD164m (consensus USD158m), EBITDA of USD18m (consensus USD27m), EBIT of USD11m (consensus USD22m), net income of USD10m (consensus USD17m) and EPS of USD0.011 (consensus USD0.024).
The Offshore Support segment is expected to provide earnings support to group earnings. However, we continue to expect weakness for the Deepwater Subsea segment (the next growth driver identified by the company), as we expect low utilisation on its existing subsea fleet, based on the current execution schedule of its subsea backlog. This would hurt margins due to high overheads. The situation has been worsened as the dayrates of the chartered-in subsea vessels Boa Sub C and Boa Deep C are relatively high. Given the dates of project executions of the subsea backlog, we do not expect Ezra to break even until Q3 2011/12e.
Q4 preview USDm Q2/11 Q4/11E Q4/11E Chg y/y % Chg
Reported DnB NOR Cons* 2011E 2012E 2013E 2011E 2012E 2013E
EBITDA marginsOffshore Support Services 19% 28% 27% 22% 23% 19% 28% 26% 26% 25% 26% 28%Marine Services 10% 6% 18% 13% 13% 10% 10% 6% 10% 8% 12% 13%Energy/ subsea 39% -17% 5% 9% 8% 43% 35% 15% 12% 27% 18% 18%AMC - - - - - - - -12% -5% -8% 9% 15% Source: DnB NOR Markets, company Note: No reported breakdown in earnings provided, so segmental earnings based on our estimates derived from back-end calculation
Sector report > Asian Offshore Supply
DnB NOR Markets - 43
17.10.2011
Estimated deepwater subsea services (EMAS-AMC)
Projections of incremental orders from AMCFY2011E (full year)
FY2011E (2H) FY2012E FY2013E
In USDm Aug-end Aug-end Aug-end Aug-endCurrent order book as of July 2011 600New EPIC/ SURF order estimates (USDm) 0 - 505 450Revenues based on % completion (year 1-3) 25% - 45% 30%Revenues (Existing backlog of USD300m as of July 2011) 85 85 130 156Revenues (FY2011 new orders) 0 0 0 0Revenues (FY2012 new orders) 0 0 126 227Revenues (FY2013 new orders) 0 0 0 113Revenues (FY2014 new orders) 0 0 0 0Revenues (FY2015 new orders) 0 0 0 0Total yearly revenues 85 85 256 496Backlog at end of each year 515 515 764 718Fixed overheads - headcounts/ admin 30 15 32 33
Total revenues (Aker Connector + New subsea projects) 85 85 269 516Total EBITDA (USDm) -7 -7 26 78
Source: DnB NOR Markets
Last subsea contract win in August Ezra announced in mid-August that its subsidiary EMAS AMC had secured a 3+2-year contract for the installation of wellhead platforms and associated pipelines in the Gulf of Thailand from Chevron Thailand worth cUSD300m. The project is expected to commence in early 2012 and end in 2016 if all the options are exercised. We believe Ezra is likely to deploy its subsea construction vessel Lewek Crusader for this job. This contract appears to be shallow-water work.
Subsea order estimate We forecast USD200m for 2010/11e (of which an estimated USD145m has been secured, assuming we can expect an average of USD60m for August’s 3+2 year contract of USD300m) and USD450m for 2011/12e. As we have already passed the year-end for Ezra, there is a shortfall from our estimate. Given that subsea contract awards are lumpy in nature and our expectation that the subsea tenders (SURF, subsea installations) remain healthy in the pipeline (as highlighted in our market outlook), we have reallocated the shortfall of USD55m to 2011/12e, taking our estimate to USD505m. We do not expect this to have a material effect on our earnings estimates, with a net impact of -1% on 2011/12e and +3% on 2012/13e EPS (see below).
Ezra reiterated its target to achieve a USD1bn order book in the next 12 months. It is actively looking to enter markets including the North Sea, West Africa, Asia Pacific and the US GoM.
Estimate revisions due to reallocation of subsea new order estimates USDmn
Subsea order backlog The current subsea backlog is estimated at USD600m, of which c86% has a longer-term execution period where potential earnings contributions could flow in.
Current subsea backlog Date Announced Customer Region Project Work Scope Vessel expected to be deployed Installation Date Estimated Value
(USDm)1-Mar-11 MODEC Angola, Africa PSVM FPSO Mooring and installation off Africa Current subsea fleet - Boa Sub C or Boa Deep C Q3 2011 0
14-Apr-11 Noble Energy Mediterranean Sea Tamar SURF Installation of 330km of umbilicals and subsea equipment
Current subsea fleet - Boa Sub C/ Boa Deep C/ Lewek Falcon/ Lewek Toucan
Q2 2012 79
25-Mar-10 ABB ABB (Connector) - SURF Installation on long-term basis Aker Connector Q2 2012 831-Mar-11 ABB Barents Sea Goliat SURF Installation of 106km of power cables Aker Connector Q2 2013 121-Mar-11 Statoil North Sea Gudrun SURF Installation of 55km power cables Aker Connector Q3 2013 4114-Jul-11 Various Asia Pacific Various SURF, platform installations Current fleet Q4 2011 - Q4 2012 8516-Aug-11 Chevron Thailand - Installation of wellhead platforms Lewek Crusader Q1 2012 - Q4 2016 300
Total order book 600 Source: DnB NOR Markets, Company
Ezra's subsea vessel fleet Name Type Ownership Remarks
1 Lewek Crusader DP3 subsea flexlay construction vessel Ezra Delivered, now on short term contract (Vietnam Chim Sao project)2 Lewek Falcon MFSV - deepwater construction and installation Ezra Delivered in Q320113 Lewek Fulmar MFSV - deepwater construction and installation Ezra Delivered in April 2011, expected to be put in supply fleet4 Lewek Constellation - Ice maiden DP3 subsea multilay construction vessel Ezra Target delivery in Q120135 Lewek Champion Heavylift construction barge Owned by 49% associate EOC Under EOC, currently on a charter contract6 Enterprise 3 Heavylift pipelay construction vessel Owned by 20% associate Perisai Term charter with Petronas until 20137 Lewek Toucan AHTS capable of deepwater installation Ezra Running down existing backlog (undisclosed)8 Boa Deep C Deepwater construction vessel Charter in from Boa Running down existing backlog (undisclosed)9 Boa Sub C Deepwater flexlay construction vessel Charter in from Boa Running down existing backlog (undisclosed)
10 Aker Connector Deepwater heavylift flexlay construction vessel Aker and Ezra JV
Target for delivery in Feb 2012, it is backed by existing contracts, including a 2+3 year charter with ABB that is expected to generate NOKm 500
11 Lewek Ambassador (fomerly DMT Topaz) Multi-functional suport DSV Ezra Going to Ezra's yard in Vietnam for upgrading works Source: DnB NOR Markets, Company
Capex and balance sheet Following the Q3 results, we forecast additional outstanding capex of USD350m, in line with the guidance. In our view, Ezra’s key subsea vessels have to start securing contracts to generate cash flow to support the capex plan.
Furthermore, we believe that in the medium to longer term (2012/13e onwards), Ezra will have to expand its subsea fleet to achieve the scale to compete with the larger subsea players such as Technip, Subsea 7 and Saipem. However, we have not factored in any such moves.
Key capex and balance sheet capacity Key capex going forward
Q3 FY2011 Q2 FY2011Balance sheet position USDm USDmCurrent cash position 106 145New capital raised post quarterly 0 0Short term debt 291 253Long term debt 643 548Net debt 827 656 Source: DnB NOR Markets
Issuance of capital securities For the proposed issue of SGD perpetual capital securities announced in early September, details of the offering (pricing) have not been disclosed as the deal is not certain to complete (target size believed to be USD100m), given current capital market conditions. From the preliminary term sheet, the structure of the securities appears to take the form of preference shares that are perpetual and may be callable at a certain points in the future. There is a step-up after the first call date and the distribution rate increases by 2% per annum in each reset period.
The preference shares should provide Ezra funding to finance its capex and loans due in 2012, reducing gearing without affecting EPS. The ‘dividends’ related to the securities would, however, reduce the free cash flow available to existing shareholders. We have yet to factor the issue into our model, awaiting the release of more details (issue size, cost, function, structure etc).
Sector report > Asian Offshore Supply
DnB NOR Markets - 45
17.10.2011
Valuation and recommendation We have lowered our NAV from SGD1.43 to SGD1.32 on the fleet update and lower valuation on the MFSV Lewek Fulmar, which is expected to remain a supply vessel rather than be upgraded to become a subsea vessel. Based on this, we have upgraded Ezra from HOLD to BUY, with a target price of SGD1.20 (10% discount to NAV). We believe this discount is warranted, due to the business risks (project execution, complexity in project management, tendering, track record as combined EMAS-AMC entity) in the subsea segment, which is company-specific, rather than asset-specific.
The share price is down 35% since Q3 report in mid-July, dragged down by poor investor sentiment and confidence on Ezra’s subsea business, in our view. Based on current valuations, we argue that the selling is overdone and valuations are attractive against the downside risk of its deepwater subsea business. We argue that the market is pricing in value destruction (assuming the turnaround story is dead) for its subsea business, which is unwarranted in our view given the base values of the assets. Even though we expect the subsea segment to only break even in Q3 2011/12e, we advise investors to look beyond short-term weak performance and focus on the earnings potential from this business as higher volume of work is secured (we expect subsea EBITDA to grow from 2011/12e in USD26m to USD78m in 2012/13e). We are positive on the outlook of the deepwater subsea sector, where we believe there will be opportunities and a market for Ezra.
Meanwhile, the offshore support segment continues to provide earnings support for the group (average USD70m over 2011/12e–2012/13e), with a high FCF-generating business.
The key risk remains relatively high leverage, which would be shunned by investors that are more risk-averse in the current macro environment. However, we believe Ezra will be safe with its capital structure, with its yard and offshore supply businesses providing the safety net for cash flow and funding support.
We argue that Ezra will be one of the first-movers among Asian peers in deepwater subsea, and it can be a good proxy for Asian mandate funds looking for such exposure. We believe that Ezra is now in a better position to compete in this market given the acquisition of AMC. In time, investor confidence is expected to return if Ezra can demonstrate it has the know-how to win and execute complex subsea projects. In this high barrier to entry market, we believe its returns should be sustainable (margins).
NAV of SGD1.32, tp at SGD1.20 based on 10% discount to NAV
Total 1651 1588NAV Calculation Q3'11Vessels not under sale and leaseback incl newbuilds 1195Vessels under sale and leaseback 393NAV of marine services assets - yards at 2012 EV/ EBITDA of 4x (USDm) 53NAV of energy services assets at 2012 EV/ EBITDA of 2x (USDm) 0NAV of EOC (49%), Ezion (14%), Perisai (20%) current market value 123Other financial assets 130Total assets 1893Reported NIBD 827Receivables from EOC -43NPV Future capex 256NPV sales leaseback commitments 73NPV of strike price for options 62Adjusted NIBD 1176Stand-alone valuation of AMC 166Equity value of all assets 883No of outstanding shares post rights issue 795New shares issue to Aker Solutions 72Total shares outstanding 868Equity value per share (USD) 1.02Equity value per share (SGD @ USDSGD 1.30) 1.32Discount to NAV -10%Equity value at discount factor of 0.9 1.19
Source: DnB NOR Markets
Sector report > Asian Offshore Supply
DnB NOR Markets - 47
17.10.2011
Market outlook – subsea Strong outlook Demand for subsea installations goes hand in hand with oil companies’ move into deeper water and more remote and harsh-environment areas. In frontier deepwater regions, fixed installations are not an economically viable solution and fields are developed using subsea wells and floating production facilities (for instance FPSOs).
The size of new discoveries is diminishing; especially in mature regions where the majority of new discoveries are small fields that do not justify stand-alone development. The only viable (i.e. economical) solution for such fields is a subsea tie-in to an existing platform.
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Source: DnB NOR Markets, World Energy Outlook 2010
Increased Oil Recovery (IOR) calls for subsea installations. Another demand driver for subsea installations in mature regions is increased oil recovery. For most gas fields, the natural reservoir pressure sooner or later becomes too low to maintain natural flow at a satisfactory production rate. One way to boost the wellstream and regain production rates is to use subsea gas compression. Instead of a surface gas compressor, a subsea gas compressor is installed on the seabed near the wellhead.
Award of subsea trees expected to increase A common indicator of the demand side of the subsea market is the number of subsea trees expected to be awarded. The number dropped in 2009, but increased again in 2010. Based on projected demand for subsea installations, the number of subsea tree awards is expected to increase significantly in 2012 onwards.
As average discoveries shrink, oil companies need to develop multiple assets, putting pressure on E&P budgets
Sector report > Asian Offshore Supply
DnB NOR Markets - 48
17.10.2011
Current tendering activity subsea construction Client Contract type Country Prod unit / Field BiddersPertamina Charter IndonesiaPetrobras Charter Brazil Brazil TBDPetrobras Charter Brazil Brazil TBD Subsea 7, ToisaPetrobras Charter Brazil Brazil TBD Subsea 7, Cecon, Global Industries, Helix, J.Ray Mcdermott, SapuraCrest, TechnipBP EPIC United Kingdom ClairBP EPIC United Kingdom Schiehallion/Loyal Saipem, Subsea 7, TechnipBPZ Energy EPIC Peru CorvinaChevron EPIC Australia Wheatstone/Iago DSME, HHI, J.Ray McDermott, Larsen & Toubro, Samsung Heavy Industries, SOMEChevron EPIC Vietnam South West Gas Program (Omon)Chevron EPIC Angola Lianzi Saipem, Subsea 7, TechnipChevron EPIC Australia Wheatstone/Iago Allseas, Leighton, Saipem, Sea Trucks, Subsea 7, TechnipChevron EPIC Vietnam South West Gas Program (Omon) DSME, Fluor, J.Ray McDermott, Samsung Heavy Industries, SOMEChevron EPIC Angola Mafumeira Sul Saipem, Subsea 7, TechnipCNOOC EPIC Indonesia Banuwati Bakrie, Guna Nusa, J.Ray McDermott, Nisoni, PT PAL, SaipemConocoPhillips EPIC United Kingdom EnochdhuConocoPhillips EPIC Indonesia Kakap SouthCPOC EPIC Joint Development MTJDA-B17 Brooke Dockyard, Kencana HL, Swiber Offshore, Thai NSCCTOC EPIC Joint Development Cakerawala HHI, J.Ray McDermott, Kencana HL, Larsen & Toubro, MMHE ++Dana Gas EPIC United Arab Emirates ZoraExxonMobil EPIC Nigeria Erha North Subsea 7, Sea Trucks, SubseaExxonMobil EPIC Indonesia Banyu Urip BW Offshore, HHIx2, Nisconi, PT McDermott Indonesia,Saipem, SBM++Gazprom EPIC Russia ShtokmanGazprom EPIC Russia ShtokmanGNPC EPIC Ghana Jubilee Unidentified Chinese company, Cecon, Modec, National Gas, Saipem, TechnipHess EPIC USA Tubular Bells/KodiakINPEX EPIC Australia Ichthys Allseas, Leighton, Saipem, INPEX EPIC Australia Ichthys J.Ray McDermott, Saipem, Subsea 7, Technip x 2INPEX EPIC Australia Ichthys DSME, HHI, J.Ray McDermott, Samsung Heavy Industries, STX Heavy IndustriesInteroil EPIC Papua New GuineaKJO EPIC Neutral Zone Hout Saipem, Technip, Fluor, Global Industires, J.Ray McDermott, Larsen & Toubro, NPCKNOC EPIC United Kingdom Western IslesNippon Oil EPIC Malaysia LayangNoble Energy EPIC Equatorial Guinea Alen (ex-Belinda)ONGC EPIC India Cluster 7 Afcons, Essar Offshore, IOEC, J.Ray McDermott, Larsen & Toubro +ONGC EPIC India WO-16 Cluster Essar Offshore, Great Offshore, HHI, Larsen & Toubro, Leighton ++ONGC EPIC India Cluster 7Pertamina EPIC Indonesia KE-39Pertamina EPIC Indonesia Global Industries, J.Ray McDermott, Sapiem, Swiber Offshore, Timas Suplindo ++Petrobras EPIC Brazil Lula Nordeste (Tupi Nordeste) Technip, WellstreamPetrobras EPIC Brazil Cernambi (Iracema)PetroChina EPIC Indonesia West Mudi DMB, PT Duta MarineShell EPIC USA Cardamom Technip, Subsea 7Shell EPIC USA Cardamom Global Industries, Helix, Subsea 7, TechnipShell EPIC Malaysia Gumusut-KakapStatoil EPIC Norway ValemonTotal EPIC Nigeria Ofon Subsea 7Total EPIC Angola Girassol Heerema, Saipem, Subsea 7, TechnipTotal EPIC Nigeria Egina West Africa Ventures,Nestoil, Saipem, Subsea 7, TechnipWoodside EPIC Australia Browse LNG Aker Solutions, ModecZADCO/ADMA-OPCOEPIC United Arab Emirates Upper Zakum HHI, McDermott, NPCC, SaipemApache Installation USA Wide Berth Helix, TechnipBP Installation Vietnam Lan Tay/Lan Do Clough Offshore, Global Industries, McDermott, Sea TrucksChevron Installation Australia Wheatstone/Iago Saipem, Subsea 7, Technip, Sea TrucksConocoPhillips Installation Indonesia Bawal DMB, Global Industries, McDermott ++ConocoPhillips Installation Indonesia Bawal Subsea 7, Swiber Offshore, Timas Suplindo, TechnipCTOC Installation Joint Development Cakerawala Brooke Dockyard, Kencana HL, Lamprell ++Daewoo Installation Myanmar Shwe/MyaEnbridge Offshore Installation USA Big FootExxonMobil Installation Nigeria Erha NorthExxonMobil Installation Nigeria Erha North Subsea 7Galsi SpA Installation Italy SaipemGazprom Installation Russia ShtokmanGazprom Installation Russia ShtokmanLam Son JOC Installation Vietnam Thang Long/Dong DoNewfield Installation USA Pyrenees Global Industries, Helix, Subsea 7, TechnipNexen Installation United Kingdom Scott Allseas, Cecon, Subsea 7, TechnipPDVSA Installation Venezuela Mariscal Sucre SaipemPearl Oil Installation Indonesia Ruby (Indonesia) Saipem, COOEC, Global Industries, HHI, Nisoni x 2 ++PEMEX Installation Mexico Tsimin McDermott, Oceangrafia, Protexa, SMCPetronas Carigali Installation Indonesia PolengPetronas Carigali Installation Malaysia Tangga Barat ClusterPetronas Carigali Installation Indonesia Bukit TuaPTTEP Installation Myanmar Zawtika Saipem, SapuraAcergy, COOEC, EMAS, Global, HHI, J.Ray McDermott ++Salamander Energy Installation Thailand BualuangSantos Installation Indonesia WortelShell Installation Norway Ormen LangeShell Installation Malaysia E11 Hub Integrated Gas ProjectTotal Installation Indonesia Sisi Nubi Global Industries, McDermott, Nisconi, Punj Lloyd, Saipem ++Total Installation Gabon Anguille Subsea 7, SBMTotal Installation Indonesia Peciko Global Industries, J.Ray McDermott, Nisconi, Punj Lloyd, Saipem ++Woodside Installation Australia Browse LNGExxonMobil IRM Nigeria Ekanga Fugro-RUEPertamina IRM Indonesia ArdjunaPetrobras IRM Brazil Brazil TBDShell IRM Nigeria KalaekuleTotal IRM Nigeria EdikanShell Removal EPIC Malaysia Semarang Global Industies, Kencana HL, TL OffshoreNoble Energy Support Equatorial Guinea Alen (ex-Belinda) PESPetrofac Support Malaysia CendorPNOC Exploration Support Philippines Source: DnB NOR Markets, ODS Petrodata
Sector report > Asian Offshore Supply
DnB NOR Markets - 49
17.10.2011
Competition landscape The main players in the high-end segment of the subsea construction business include Subsea 7, Technip and Saipem. In the medium- to low-end the list of companies is more comprehensive but we would highlight DOF Subsea, Helix, EMAS-AMC and EOC, Bibby Offshore, McDermott, Global Industries, Swiber Offshore, Oceaneering, Cecon, SapuraCrest, Bumi Armada and Heerema. SBM Offshore is also building a diving support vessel and we expect the company to increase its exposure to the subsea market.
As illustrated below, Ezra has moved itself up the value chain, closer to full-service providers such as Technip, Subsea 7 and Saipem. We believe Ezra is well-positioned in the Asian subsea space, as it enjoys good relationships with clients in the region. However, the market remains dominated by the top three high-end subsea players Technip, Subsea 7 and Saipem.
The high end of the subsea construction market has high barriers to entry due to the complexity of projects in deeper waters and harsh environment regions. We expect this part of the market to stay consolidated. For the low end we expect competition to increase as we expect several new companies to try to penetrate the market. When assessing the supply/demand balance for the subsea construction sector, it is therefore important to bear in mind this polarisation of the market. It is also vital to remember that assets alone are not enough to penetrate the subsea construction market. Engineering capacity (to our knowledge the industry is stretched with regards to human capital) and a proven track record are just as important as the actual vessels. Following the Macondo accident we expect track records to have become more important for oil companies.
Market landscape in deepwater subsea
Source: Technip
Value-added (translating into returns) to come from engineering skills The successful integration of AMC (high operating leverage from fixed overheads), good execution of the current subsea backlog (margins), and contract wins are likely to be in focus going forward, in our view, and are vital to raising investor confidence in the shares.
We expect more companies to continue their efforts to penetrate the subsea segment, which may cause vessel expansion. We are, however, not overly concerned about increased competition worldwide due to the complexity of the projects, which continues to increase. The cost of failure and delays is too high for oil companies, as it delays production start-up.
Sector report > Asian Offshore Supply
DnB NOR Markets - 50
17.10.2011
As there is more value-added in provided subsea services rather than just vessels, we expect the returns to remain superior for engineering companies. SUBC, Technip and Saipem’s key assets are their ability to execute on large and complex projects and we consider the vessels to be necessary, but not sufficient tools. Hence, it is important for Ezra to leverage on AMC’s engineering knowledge and demonstrate its ability to execute complex subsea projects with the new combined entity EMAS-AMC. Before this, winning such contracts will be the initial challenge. We believe this will be a great boost to the business and investor confidence should Ezra be successful in this area. We expect this process to take time due to the lead time needed for planning, identifying the tendering opportunity, getting qualified, positioning for tenders, bidding, winning and execution.
Size and engineering important for utilisation Company size does matter for fleet utilisation in subsea construction. The direct link between size and utilisation is a product of: 1) proven track record; 2) engineering capacity; and 3) flexibility provided by a large vessel fleet. The figure below shows the worldwide utilisation for the subsea construction fleet for January 2011 and August 2011 together with reported vessel utilisation for Subsea 7 and Technip in Q2. Overall utilisation for Subsea 7 and Technip was significantly higher than global utilisation.
Vessel utilisation – subsea construction fleet
67 %
49 % 50 %
74 %
80 % 80 %
57 %
45 %
59 %
65 %
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
All subseaconstruction
Pipelay Derrick pipelay Diving support Subsea 7 Q22011
Technip Q2 2011
CSV utilization August 2011 Utilization January 2011 Source: DnB NOR Markets, ODS Petrodata, Companies
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
EZRA Holdings
Rebased price (12m, SGD)
70
75
80
85
90
95
100
105
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
EZRA Holdings
Rebased consensus average forward EPS (12m, USD)
0
200
400
600
800
1,000
1,200
2007 2008 2009 2010 2011e 2012e 2013e0%
20%
40%
60%
80%
100%
120%
Revenue (USDm) Revenue Growth
Revenue GrowthRevenue (USDm)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
2007 2008 2009 2010 2011e 2012e 2013e0.000
0.010
0.020
0.030
0.040
0.050
0.060
EPS (USD) DPS (USD)
DPS (USD)EPS (USD)
0
50
100
150
200
250
2007 2008 2009 2010 2011e 2012e 2013e0%
5%
10%
15%
20%
25%
30%
35%
EBITDA (USDm) EBITDA margin
EBITDA marginEBITDA (USDm)
-700
-600
-500
-400
-300
-200
-100
0
100
200
2007 2008 2009 2010 2011e 2012e 2013e0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
FCF (USDm) Dividend yield
Dividend yieldFCF (USDm)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2007 2008 2009 2010 2011e 2012e 2013e0%
10%
20%
30%
40%
50%
60%
Price/Book ROE
ROEPrice/Book
Sector report > Asian Offshore Supply
DnB NOR Markets - 53
17.10.2011
Jaya Holdings (BUY, TP SGD0.90) Attractive M&A target Jaya is a leading shipbuilder in Asia, with shipyards in Singapore, Batam Indonesia, and China. The yards specialise in small-mid offshore support vessels (OSV), such as AHTS, PSV and barges. It also owns and charters a fleet of 21 OSVs, mainly bareboat and timecharters, with contract lengths ranging from months to 1–3 years.
Unlike other conventional shipyards that build vessels to order, Jaya builds vessels under its internal newbuild plan and sells them when they are close to completion or ready. Based on market demand, newbuild vessels are either sold or added to the chartering fleet. This makes Jaya extremely cyclical; it was distressed in 2009, but restructured without dilution for shareholders. Jaya has 22 vessels under its newbuild plan.
Earnings volatility should be expected as the majority of earnings are driven by vessel sales. Its business model is building vessels for sale, instead of conventional shipyards that build to order. Hence, the timing of vessel sales is the key variable in driving earnings. Going forward, we expect fewer vessel sales as more newbuilds are expected to be added to the chartering fleet. This is expected to lower near-term earnings as chartering income is spread across a longer period.
Divisions • Yards (shipbuilding and ship repair). Owns and operates three shipyards,
in Singapore, Indonesia (Batam) and China (Nantong/Qidong), with combined shipbuilding capacity of 6–8x OSVs (4,000–16,000bhp for AHTS) and 3–4 barges (3,000–10,000dwt) over a 15-month building cycle. It specialises in AHTS (5,000–16,000bhp), PSV (1,000–3,000dwt), utility supply vessels, tugs and accommodation work barges (1,000–10,000dwt).
• Chartering. Owns 23 vessels, mainly on bareboat and time charters. Jaya has stated its strategic intent to optimise the fleet and increase its exposure in this segment.
Assets • Chartering: 23 vessels, mainly small to mid-sized AHTS (see fleet list). • Newbuilds under construction internally for sale: 22 vessels, mainly AHTS
(see fleet list). • Three shipyards, in Singapore, Batam and China. The Chinese yard is an
outsource yard.
Recent developments • Change of key shareholders in February, with Nautical Offshore exiting its
55% stake in Jaya to a Cathay Asset Management-led consortium.
• Q4 2010/2011 earnings release in August.
Expected newsflow • Potential vessel sales announcements. • New contracting contracts, in the Middle East and Asia Pacific (Malaysia,
Indonesia, Thailand, and Vietnam). • Q1 2011/12e results, which are due out in mid-November.
Valuation Our NAV is SGD0.94 per share. Jaya is trading on a steep discount of 52% to our NAV, presenting an attractive risk/reward payoff in our view. We reiterate our BUY recommendation and NAV-based target price of SGD0.90.
Sector report > Asian Offshore Supply
DnB NOR Markets - 54
17.10.2011
Q1 2011/12 preview (September year-end) Jaya is due to report its Q1 2011/12 results in mid-November.
Not expecting strong Q1; chartering is the main contributor We expect Q1 earnings to be driven mainly by chartering income. Lumpy earnings are again expected from the shipbuilding segment, where we forecast a newbuild sale of a 5,150bhp AHTS for SGD18m (USD14m).
As mentioned in previous reports, Jaya intends to increase its business mix in the chartering segment by streamlining its fleet, moving newbuilds to the chartering fleet, and disposing of older assets. However, we have yet to factor into our estimates the potential contracting contribution from the newbuilds, due to the limited information on which ones will eventually be put in the chartering fleet.
For now, given that the shift to higher chartering exposure will take time (fleet optimisation, securing contracts), Jaya’s build-to-sell OSV yard business model is likely to make earnings volatile.
Its yard business model is to build vessels for sale, instead of conventional shipyards that build to order. Hence, the timing of vessel sales (earnings recognised when vessels are sold, instead of industry norm of percentage completion) is the key variable in driving earnings. This segment is extremely cyclical and geared towards the offshore cycle.
We thus reiterate that it is challenging to model estimates for Jaya due to the complexity and number of fleet changes (disposals and newbuild additions).
We also expect vessel sales from its chartering fleet for fleet optimisation reasons. These would not be recognised in the shipbuilding segment, but rather as gains or losses from disposal. We stress that, given Jaya’s business model, such gains should not be viewed as one-offs but rather as economic profits. We forecast chartering utilisation of 73% for Q1, compared with 67% in Q4 2010/11 and 61% in 2009/10. We expect utilisation to trend upwards from increasing activity in Malaysia, Indonesia, Thailand, Vietnam and the Middle East. With relatively lower utilisation than peers, we argue that Jaya offers higher earnings upside potential when its fleet utilisation improves.
Operating revenues 16.9 39.7 na 22.8 134% 295 698 541EBITDA 9.9 13.7 na 3.7 37% 80 157 128
EBIT 3.0 7.0 na 4.0 133% 53 130 98Net f inance -3.0 -1.7 na 1.3 n.m -7 -6 -6Pretax earnings 0.0 5.3 na 5.2 20173% 46 123 92Gains on vessel disposals (not in new build f leet) 50.2 7.8 na -42.4 -85%Net result including gains on vessel disposals 2.2 4.4 na 2.2 97% 38 102 76
EBIT breakdownShipbuilding 24 0 0 0 24 3 7 10 19 40 120 88Conventional Shipping 0 0 0 0 0 0 0 0 0 0 0 0Offshore Shipping 5 1 2 3 12 4 4 5 5 18 15 15 Source: DnB NOR Markets, company Note: EBITDA based on our calculations from disclosed profit after tax for each segment, excluding common expenses
Sector report > Asian Offshore Supply
DnB NOR Markets - 55
17.10.2011
Balance sheet strength With cash of SGD231m, net debt of SGD88m, net gearing of 16%, outstanding capex of cSGD466m and an estimated NAV for its vessels of cSGD1.1bn, we believe Jaya has the resources necessary to fund its capex programme and position itself in a market with improving fundamentals (activity is picking up and there is a better demand/supply balance in OSV).
Key assumptions for shipbuilding segment Key assumptions for Shipbuilding segment Q1/12e Q2/12e Q3/12e Q4/12e 2012E 2013E 2014E
Existing order backlog (30 WIP vessels as of Q4 FY2010):Est outstanding units in WIP existing order book for sale (unit) 21 20 18 15 15 4 0Expected no of completed vessels sold from existing orderbook (unit) -1 -1 -2 -3 -7 -11 -4Est value of vessels sold from existing orderbook (SGDm): A 18 38 52 96 205 390 133
New vessels assumed for continual newbuild plan (own yard):Est new vessel orders for internal newbuild plan (unit) 0 0 2 7 9 14 14Expected no of completed vessels sold from new vessel orders (unit) 0 0 0 0 0 -7 -10Est value of vessels from new orders (SGDm) 0 0 49 244 292 473 487Value of vessels sold from new orders (SGDm): B 0 0 0 0 0 214 310
Vessels transferred to chartering fleet 0 0 0 0 0 0 0Vessels sold from current chartering fleet 1 2 3 4 0 0 1
Total revenues (A + B) 18 38 52 96 205 604 443EBITDA margins assumption - 20% 20% 20% 20% 20% 20%EBITDA (SGDm) 4 8 10 19 41 121 89 Source: DnB NOR Markets
Average dayrates and utilisation
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Financial year
SG
D/d
ay
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Average utilisation rates Average dayrates (SGD) Source: Company, DnB NOR Markets
Undemanding implied vessel values Based on the current share price, we argue that the implied vessel values are undemanding, making this an attractive entry point for investors. We do not rule out the possibility of Jaya being an attractive M&A target for supply companies, as it is trading at a significant discount of 52% to our NAV. We believe supply companies could be interested if Jaya were to adopt more of a chartering focus (higher margins, more stable income).
Sector report > Asian Offshore Supply
DnB NOR Markets - 56
17.10.2011
Implied vessel values based on current share price
Vessel Name Type Bhp/dwt Built % Ownership Status NAV (USDm)
Implied NAV (USDm) based on
current share price
Sales leaseback
USDSGD ex
Net ownership (SGDm)
1 JAYA SEAL AHTS 5,500 BHP 2004 100% Time charter 12 8 No 1.22 102 JAYA TREASURE 2 AHTS 5,150 BHP 2005 100% Time charter 12 8 No 1.22 103 NOR SPRING AHTS 7,956 BHP 2008 100% Bareboat 24 17 No 1.22 204 NOR CAPTAIN AHTS 10,880 BHP 2007 100% Bareboat 28 20 No 1.22 245 Jaya Concordia AHTS 8,000 BHP 2010 100% Available 25 18 No 1.22 216 DJM Fortune 3 AHTS 4750 BHP 2004 0% Managed 8 6 No 1.22 07 JAYA DEFENDER(887C) AHTS 10,800 BHP 2009 100% Time charter 30 21 No 1.22 268 JAYA AMANDAM AHTS 4,800 BHP 2009 100% Transition 9 6 No 1.22 89 JAYA AMARA(HT06-2014AHTS 4,800 BHP 2009 100% Spot 9 6 No 1.22 810 Sea Hawk 1 AHTS 12,000 BHP 2010 100% Newbuild 35 25 No 1.22 3011 JAYA DAUPHIN AHTS 10,800 BHP 2009 100% Time charter 30 21 No 1.22 2612 JAYA PUFFIN 2 Utility support 3,500 BHP 2004 100% Transition 8 6 No 1.22 713 Jaya 300 Deck cargo bar 9,000 DWT 2007 100% Jetty 5 4 No 1.22 414 DJM Fortune 5 AHTS 4750 BHP 2004 0% Managed 8 6 No 1.22 015 Jaya 301 Deck cargo bar 9,000 DWT 2007 100% Jetty 5 4 No 1.22 416 Jaya 302 Deck cargo bar 9,000 DWT 2007 100% Transition 5 4 No 1.22 417 Jaya Installer 9 - 400p Accom barge 9,954 DWT 2010 100% Bareboat 35 25 No 1.22 3018 JAYA SCOUT AHTS 4,750 BHP 2004 100% Operating 9 6 No 1.22 819 JAYA MERMAID 3 AHT 5,150 BHP 2007 100% Bareboat 10 7 No 1.22 920 Jaya Chieftain AHTS 8160 BHP 2010 100% Available 25 18 No 1.22 2121 AHTS newbuild 10 - JayAHTS 8,000 BHP 2010 100% Available 25 18 No 1.22 2122 Jaya Almighty AHTS 5,150 BHP 2010 100% Operating 12 8 No 1.22 1023 Jaya Conqueror AHTS 8,000 BHP 2010 100% Available 25 18 No 1.22 21
Total 323
Current newbuild vessels earmarked for sale
Vessel Name Type Bhp/dwtExpected delivery % Ownership Status NAV (USDm)
NAV Calculation SGDm MethodNAV of all vessels 760 FMVNAV of yard 27 1x book value as of FY2010Total assets 787
FY2012e NIBD + future discounted capex & newbuilds' costs 437Net value of all assets 350No of outstanding shares 770Equity value per share (SGD) 0.45
Incl remaining cost to complete the outstanding newbuild plan
Source: DnB NOR Markets
Sector report > Asian Offshore Supply
DnB NOR Markets - 57
17.10.2011
Valuation and recommendation We are positive on Jaya because of: 1) its intent to shift more weight to its chartering segment, which could put it on the M&A radar screen of offshore companies; 2) the higher margins and earnings upside in its chartering segment given the room for utilisation growth; 3) its relatively strong balance sheet; and 4) the undemanding market-implied valuations on its fleet.
We believe further sector consolidation is generally expected, backed by positive fundamentals and companies’ relatively strong balance sheets. In Jaya’s case, healthy cash balances give European and US offshore companies the firepower for acquisitions. We argue that a potential suitor for Jaya is likely to be a corporate – rather than financial – investor, as the synergistic effects (market expansion, cost management, infrastructure) would be greater. Jaya’s main competitive advantages are: 1) well-managed and good yard execution in small to mid-size OSV vessels, which gives it good a niche; and 2) relatively good market intelligence in the chartering markets in Asia and the Middle East, which demand market know-how and know-who, seizing market opportunities in these growing regions.
We value Jaya on the NAV of its fleet, and our fair value is SGD0.94. Due to its business model, we argue that the valuation should be based on the aggregate NAV of its fleet (chartering and newbuilds planned). Jaya is trading on a steep discount to our NAV, presenting an attractive risk/reward payoff. We reiterate our BUY recommendation and SGD0.90 NAV-based target price.
NAV of fleet – SGD0.94/share
Vessel Name Type Bhp/dwt Built % Ownership Status NAV (USDm)Sales
leasebackUSDSGD
ex
Net ownership (SGDm)
1 JAYA SEAL AHTS 5,500 BHP 2004 100% Time charter 12 No 1.22 152 JAYA TREASURE 2 AHTS 5,150 BHP 2005 100% Time charter 12 No 1.22 153 NOR SPRING AHTS 7,956 BHP 2008 100% Bareboat 24 No 1.22 294 NOR CAPTAIN AHTS 10,880 BHP 2007 100% Bareboat 28 No 1.22 345 Jaya Concordia AHTS 8,000 BHP 2010 100% Available 25 No 1.22 316 DJM Fortune 3 AHTS 4750 BHP 2004 0% Managed 8 No 1.22 07 JAYA DEFENDER(887C) AHTS 10,800 BHP 2009 100% Time charter 30 No 1.22 378 JAYA AMANDAM AHTS 4,800 BHP 2009 100% Transition 9 No 1.22 119 JAYA AMARA(HT06-2014) AHTS 4,800 BHP 2009 100% Spot 9 No 1.22 1110 Sea Hawk 1 AHTS 12,000 BHP 2010 100% Newbuild 35 No 1.22 4311 JAYA DAUPHIN AHTS 10,800 BHP 2009 100% Time charter 30 No 1.22 3712 JAYA PUFFIN 2 Utility support 3,500 BHP 2004 100% Transition 8 No 1.22 1013 Jaya 300 Deck cargo bar 9,000 DWT 2007 100% Jetty 5 No 1.22 614 DJM Fortune 5 AHTS 4750 BHP 2004 0% Managed 8 No 1.22 015 Jaya 301 Deck cargo bar 9,000 DWT 2007 100% Jetty 5 No 1.22 616 Jaya 302 Deck cargo bar 9,000 DWT 2007 100% Transition 5 No 1.22 617 Jaya Installer 9 - 400pax Accom barge 9,954 DWT 2010 100% Bareboat 35 No 1.22 4318 JAYA SCOUT AHTS 4,750 BHP 2004 100% Operating 9 No 1.22 1119 JAYA MERMAID 3 AHT 5,150 BHP 2007 100% Bareboat 10 No 1.22 1220 Jaya Chieftain AHTS 8160 BHP 2010 100% Available 25 No 1.22 3121 AHTS newbuild 10 - Jaya Cavalier AHTS 8,000 BHP 2010 100% Available 25 No 1.22 3122 Jaya Almighty AHTS 5,150 BHP 2010 100% Operating 12 No 1.22 1523 Jaya Conqueror AHTS 8,000 BHP 2010 100% Available 25 No 1.22 31
Total 461
Current newbuild vessels earmarked for sale
Vessel Name Type Bhp/dwtExpected delivery % Ownership Status NAV (USDm)
Kencana Petroleum (Under Review) Play on Malaysia’s oil service industry Kencana Petroleum is a Malaysia-based oil service company, focusing on providing EPCC services, marine engineering and offshore marine support services primarily in the domestic and Asia regions. Besides this, it has moved into building, refurbishing, repairing and converting marine vessels and offering offshore drilling services (with Mermaid Maritime) as well as the chartering of vessels and rigs with partners. Backed by an established track record, Kencana is a preferred integrated service provider to upstream players. In Malaysia, only seven major offshore fabrication contractors are approved by Petronas and Production Sharing Contract operators (PSC) and have a licence to participate in Petronas tenders; Kencana is one of these.
We like Kencana for its exposure to Malaysia’s oil service industry, with the company looking at MYR3bn–5bn worth of fabrication tenders and driven by positive E&P spending by NOC Petronas. We rate soft factors – such as the strong working relationships forged with Malaysia's NOC Petronas (evident in project wins) – highly in this relatively protected local market. Kencana is looking to maintain a minimum base fabrication order backlog of MYR1bn, through new contracts, at all times.
Divisions • EPCC/Marine engineering services. Core business of providing EPCC
services in engineering and design, fabrication of production facilities (platforms, jackets, wellheads), modules & process skid systems (subsea manifolds), installation (usually outsourced for offshore installations), hook-up and commissioning.
• Offshore support services. Plans to expand the fleet to include more marine assets, to provide a wide range of offshore services in the oil & gas industry including the chartering of rigs and marine vessels.
• Drilling services. Plans to operate tender rigs and drill in Malaysian waters. Current fleet includes the tender rig KM-1 to Petronas on a 5+3+2 year drilling contract, expected to commence in 2010/11.
Assets • 543,000sqm fabrication yard in Malaysia, with 24/7 covered workshops
providing specialised steel fabrication and infrastructure. • Full ownership of the tender drilling rig KM-1.
Recent developments • Part of the consortium (owning 25% stake) that won the gas development
of Berantai field contract from Petronas off Malaysia. • So far in 2010/11 (July-end), cMYR1,628m of new orders have been
secured (including MYR734m EPCC contracts we forecast from Kencana and consortium’s Berantai project).
• Proposed merger between SapuraCrest and Kencana in July. • Kencana announced in late August that it would build two newbuild
tender assisted drilling rigs (TADR) based on an improved version of the KM-1 design, at its fabrication yard in Lamut. Estimated completion is Q1 2012/13.
Expected newsflow • Possible new EPCC contracts from the upcoming tenders in Malaysia
(Petronas) and other Asian regions. • Q1 2011/12e results, which are due out in December.
Valuation Our recommendation is Under Review (previously SELL), pending the conclusion of the merger between Kencana and SapuraCrest.
Sector report > Asian Offshore Supply
DnB NOR Markets - 61
17.10.2011
Q4 2010/11 update (July year-end) Kencana released its Q4 2010/11 (July year-end) in late September. Below we include the text we wrote in our initial comments post the earnings.
For Q1 2011/12e (October end), we plan to issue a separate preview closer to the expected release, in December.
Key takeaways from Q4 earnings Q4 revenues were higher than expected, due mainly to better progress on the EPCIC orderbook as well as contributions from the diving support business. However, operating margins were below our expectations with a reported EBIT margin of 16.2% versus our estimate of 19.5%. We believe this is due mainly to lower margins in hookup and commissioning (HUC) projects. Q4 revenues were +12% versus our forecast, EBITDA was +7%, EBIT was -7% and EPS was +1%.
Regarding the proposed merger of Kencana and SCRES, the board resolved to accept the offer by IKSB in August 2011. We expect the merger to complete by Q1 2012 and the integration (which we believe has begun) process to take longer. The KEPB share price dropped 9% after the merger announcement in July, and the offer is now at an 18% premium. Based on the offer terms and current share price, the cash yield (cash offer component) is c19%, which we consider attractive. For the value of the IKSB shares (share swap for KEPB’s shares), we argue that the key swing factor in the combined entity (IKSB) is the NPV of synergies. We reiterate that integration is the key to success.
Our recommendation is Under Review (previously SELL), pending the conclusion of the merger.
Absolute earnings in line with our expectations The Q4 2010/11 EBITDA margin was 17.7%, below our estimate of 18.6% and slightly below 2009/10’s average of 18.1%. We believe this was due mainly to hookup and commissioning related projects. The Q4 figures (our estimate and % change YOY and QOQ in brackets) were: revenue of MYR493.7m (MYR441.1m, +77%, +30.7%), EBITDA of MYR87.5m (MYR82m, +51%, +9.5%), EBIT of MYR80m (MYR86m, +54%, +9.2%), net income of MYR63.7m (MYR63.1m, +54%, +12.9%), and EPS of MYR0.035 (MYR0.034).
EPCIC: higher revenues due to variation in project recognition The higher than expected revenues were due mainly to better than expected progress of projects in the existing EPCIC order book (including HUC and subsea engineering services results, which have been grouped together with the drilling segment from this quarter). As we have highlighted in previous updates, it is normal for revenue recognition in the EPCIC segment to be lumpy, due to variations in completion schedules across projects in Kencana’s portfolio.
This quarter, Kencana also reported contributions from its new dive support business, contributing to the quarter’s performance. Adjusting for the reporting changes, and based on our drilling segment estimates, implied blended Q4 EPCIC revenue was MYR454.9m (we forecast MYR396.7m). The implied blended EBIT margin was 10.8% (we forecast 14.7%). We believe the drag on margins on a blended basis was due mainly to the HUC projects (for more details, see later). On our estimates, the implied margin on the hookup and commissioning business is 3%, far lower than the c36% average drilling segment margin and c12% average EPCIC segment margin.
Drilling (KM-1 rig): lower margins on blended basis including HUC As mentioned earlier, the drilling segment included the results from HUC as well as some subsea engineering businesses in Q4. The ‘as reported’ segment results showed an EBIT margin of 9% versus our estimate of 14.7% (which included only KM-1). Although the company did not provide a sub-segment breakdown for drilling, HUC and subsea engineering, we estimate pure drilling revenue of cMYR39m and an EBIT margin of c38.4%, with contributions coming only from the KM-1 rig.
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Expansion of drilling fleet through two tender rig newbuilds Kencana announced in late August that it would build two newbuild tender assisted drilling rigs (TADR) based on an improved version of the KM-1 design, at its fabrication yard in Lamut. Estimated completion is Q1 2012/13. This should add to Kencana’s competitiveness as it continues to build its drilling business.
Merger update KEPB accepted the offer by IKSB subject to terms and conditions that include obtaining all the requisite approvals. We expect the merger to complete by Q1 2012 and the integration (which we believe has begun) to take longer. The share price of KEPB dropped 9% after the merger announcement in July and the offer was at an 18% premium. Based on the offer terms and current share price, the cash yield (cash offer component) is c19%, which we consider attractive.
For the value of the IKSB shares (share swap for KEPB’s shares), we argue that the key swing factor in the combined entity (IKSB) is the NPV of synergies, which can be broken down into earnings expansion through revenue growth (international markets such as Brazil, Australia and South East Asia) and an improving cost structure (shared services and efficiency in work process).
Integration is key to success. We reiterate that the integration will take time, as in all mergers, but we are not able to estimate the timeframe. Integration comes in the form of consolidating strategic plans, potential reaping of synergies gains in revenue growth through market/geographical expansion and cross-selling, streamlining shared services, and amalgamating the organisation culture of the two entities.
Please see separate report on the proposed merger issued in July.
No contribution from Berantai development project yet There was no contribution from the Berantai oilfield development project, which commenced early this year. As highlighted previously, we believe this is mainly because Petronas and the other contractors (such as Kencana, SapuraCrest and Petrofac) are still ironing out issues concerning the accounting method to be adopted for the recognition of revenues and costs as this is the first ever risk service contract to be awarded by Petronas.
Valuation and recommendation Our recommendation is Under Review (previously SELL), pending the conclusion of the merger between Kencana and SapuraCrest.
Keppel Corp (BUY, TP SGD10) Conglomerate, with offshore yards focus Keppel Corp is one of Singapore’s largest multinational groups, with its core business in offshore and marine, property and infrastructure. The main shareholder is state-owned Temasek Holdings, with 21%. The key earnings driver remains the Offshore & Marine segment, contributing 49% of our SOTP valuation and 58% of 2011e EBITDA.
Assets • Keppel Offshore and Marine (48% of SOTP). Global yard leader in
offshore rig design, construction and repair, ship repair and conversion, and specialised shipbuilding. It harnesses the experience and expertise of 20 yards and offices worldwide to be near customers and markets.
• Property (14%). Focus on two core businesses of property development (Keppel Land) and property fund management (K-Reit, Alpha Investment Partners). It is geographically diversified in Asia, focused on Singapore, China, Vietnam, Indonesia and India. Listed property exposure is through its Singapore-listed property companies (Keppel Land and K-Reit).
• Infrastructure (12%). Focus areas are telecom, transport, environmental engineering and power generation. The majority of the investment is in KIE and Singapore-listed Keppel T&T.
• Investments (2%). Associate investment in Singapore-listed K1 Ventures, K-Green Trust and Dyna-Mac.
• Unlisted assets (22%). Property subsidiaries and associates. • Net cash (2%). Adjusted net cash position.
Recent developments • Secured close to SGD8.6bn of new orders YTD. • SGD10.4bn order book (expected book to bill ratio 1.3x) should provide
revenue and earnings visibility for the next 22 months. • Q3 results due out on 20 October. • Exercised of newbuild jack-up option by Ensco for USD245m in early Oct. • Lapsing of three newbuild jack-up options; six options remaining. • Bonus share issue of 10% increase in shares outstanding in April. • The Petrobras newbuild rig tender for the remaining 21 rigs was opened in
October. Keppel is in the running for six rigs (indicative pricing USD650-750m each), and we believe it is likely to tender for the semi-sub design. We believe Keppel is well-positioned for the orders, after the opened bids but are unable to quantify the valuation impact at this time due to the limited information available on the rig pricing and terms. As stated before, potential orders from this tender have not been factored into our model.
Expected newsflow • New orders internationally from rig owners and oil companies. And the
exercise of four of eight existing outstanding newbuild jack-up options. • Petrobras tender awards in late 2011. • The Q3 results are due out on 20 Oct.
Valuation We value Keppel using a SOTP valuation of SGD10.13. We reiterate our BUY recommendation and SGD10 target price.
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Q3 preview The Q3 results are due out on 20 Oct.
We do not disagree with the widely held view that newbuild activity will slow down; however, we argue that the market is too defensive and is pricing in a weaker than normalised cycle. As one of the world’s top offshore yards, we believe a normalised cycle would result in sufficient demand to fill its slots. The jack-up and deepwater floaters segments remain supported by robust activity. We believe that robust activity and the tightening of the ultra-deepwater (UDW) space might result in new ordering activity in the medium to longer term. This would be a positive trigger for both Keppel and SMM, as they have seen limited deepwater new orders in this cycle, with most drillship orders going to the Koreans. We now see a greater chance that deepwater semi-sub drilling rig orders will return and believe that the Singapore rig builders will be well-positioned for them.
Our base-case scenario assumes the O&M ordering cycle normalises, with sufficient demand to fill slots at top-end yards. SMM and KEP are the top rig builders in this market and we believe are in a good position to maintain market share in the rig building segment of jack-ups and semis.
The SGD10.4bn order book (expected book to bill ratio 1.3x) should provide revenue and earnings visibility for the next 22 months. Keppel is known for its excellent track record in project execution, with strong operating margins over the past few years. We believe it will be able to achieve a ‘new normal’ margin above 14% (normalised EBITDA margin 14.5% 2006–2010) in the long run, due to continued improvements in cost management, project management, and R&D.
Apart from O&M, we expect the Infrastructure business (c9% of 2011e EBIT) to enhance its returns, with key projects (treatment plants and TianJin Eco-City) gaining operating efficiency and optimal production. We have already seen EBIT margin improvements: from 3% in 2010 to 5% in H1 2011.
The 2011e annualised dividend yield of 5% is also expected to support the share price. Keppel has declared an interim dividend of SGD0.17 per share for Q2, equalling 40% of our full-year dividend forecast of SGD0.42.
Downside risks Risks include further market weakness, which would put downward pressure on the shares, as Keppel is widely regarded as a beta stock (c5% of the FFSTI index) and is well-held by institutional investors.
Other potential risks relate to orders in the current backlog and the payment terms associated with secured orders. Rig orders (cSGD7.4bn) made since October 2010 have been mainly on a bullet payment structure (20% initial downpayment, 80% upon delivery), and 80% of orders have yet to be financed. Hence, in a downcycle scenario where speculative rig owners default due to a lack of access to funding and chartering contracts, yards may end up with newbuilds (similar to the previous downcycle, when we saw delays from Skeie Drilling Production – now Rowan, changes to orders by Seadrill, and cancellation by MPU). In the event of cancellation, we argue that Keppel would be able to maintain a buffer (cost of building a rig is below market value) to protect its downside, given its execution capabilities.
Q3 earnings not expected to be a key price event We expect Q3 revenues of SGD2,361m, EBITDA of SGD366m, EBIT of SGD312m, net income of SGD285m, and EPS of SGD0.16. No quarterly consensus is available, but on a full-year EPS basis we are 4% below for 2011e, 19% below for 2012e, and 23% below for 2013e.
In current weak macro uncertainty, we believe the upcoming Q3 report (due 20 October) will receive limited investor focus. We expect an EBITDA margin of 16.6% in the O&M segment, where the trend is expected to wane from the strong 25% in H1 and normalise close to our long-term forecast of 14%.
Order book quality As highlighted previously, examining and monitoring the quality of the order book is a prerequisite, particularly in choppy markets where down-markets heighten the possibility of payment delays and even order cancellations, in a worst-case scenario. In Keppel’s case, after expounding on the existing order
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book, the value of orders arising from less-established players (we classify as without an operating track record) accounts for SGD1.7bn, or 17% of the total order backlog. In a worst-case scenario, if these orders were cancelled, we argue that Keppel has the balance sheet (net gearing 0.1x) and resources to finance the orders as a stop-gap measure.
Existing order book of SGD10.4bn
Date ordered Unit typeNo of unit Type Client Value Currency
Expected delivery SGDm USDm
Estimated progress of completion
(%)
Estimated value left (SGDm)
% breakdown
1-Nov-2007 Super 116E jackup 4 Jackup Rowan 780 USDmQ22010 to
Q42011 1178 780 95% 59 0.60%6-Jun-2008 B class jack-up 1 Jackup Seadrill 210 USDm Q22010 317 210 100% 0 0.00%
Total backlog including JV orders 10368 Source: Company, DnB NOR Markets
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Valuation and recommendation SOTP suggests upside potential We value Keppel using a SOTP valuation, driven largely by the marked-to-market values of listed entities and DCF valuation of the O&M business. In our O&M valuation, we model long-term annual order intake of SGD4.7bn and an EBITDA margin of 14%.
We reiterate our BUY recommendation with a SOTP-based target price of SGD10.
Floatel International (FLOAT NO, 31.7% owned) 130 1% 1%Before amalgamation offer is concluded
5) Unlisted value of subsidiaries net of O&M & Infrastr. 1,576 9% 8% Book value 6) Unlisted value of associates 2,415 13% 13% 2.5x PB7) Adjusted net interest-bearing debt (NIBD) -312 2% na Adj for NIBD of min.
NIBD 955 Q2 2011NIBD of minorites 1,266 Q2 2011
Total equity value 18,038 100%Total no of outstanding shares 1780Total equity value per share 10.13
SSource: DnB NOR Markets estimates Note *Excluding cash: % of assets excluding NIBD/cash
Trough scenario In a trough scenario, the share price could fall to SGD5.87 based on a 1.3x trough P/B (in Q4 2008) on 2011e estimates. We use P/B as the benchmark given Keppel’s asset-heavy business in the property and infrastructure segments. We cannot rule out 33% downside in such a scenario, but we do not consider it likely.
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Market outlook – new orders Newbuild activity remains healthy; but slower than expected Although newbuild activity is expected to slow, it should remain high in the jack-up and deepwater floaters segments. Our view is that newbuild activity will remain high, but that the pace will be slower than in recent quarters due to macro factors (such as potentially tighter financing).
We believe that robust activity and tightening of the ultra-deepwater (UDW) space could result in new ordering activity in the medium to longer term. This would be a positive trigger for both Keppel and SMM, as they have seen limited deepwater new orders this cycle, with most drillship orders going to the Koreans. We now see a greater chance that deepwater semi-sub drilling rig orders will return and believe that the Singapore rig builders will be well-positioned for them.
Premium jack-up remains tight Premium jack-up utilisation of 96% is very tight, compared to 78% in August 2009. Contract coverage in 2013e is expected at 38%, which is relatively decent given the new jack-ups coming into the market and the shorter contract length of jack-ups (shorter time to drill shallow-water wells).
UDW ordering activity Dissecting the newbuild cycle since October 2010, we see that the 41 UDW floaters ordered recently include 7x drillships by Petrobras, 5x semis (2x cat-D Statoil, 2x Sevan). Excluding these, there are 29 drillships being placed. We expect most of these drillships (at least 21) to go to Brazil due to its delayed newbuild programme. Hence, the UDW market is far from overcrowded. In fact, with the ultra-deepwater market characterised by superior visibility and higher dayrates, we expect newbuild ordering activity in the UDW to come back.
Return of deepwater rig orders is the price trigger The key takeaway from our recent trip to Houston to meet 15 oil service companies was that they remained highly optimistic that dayrates would continue to move higher. Optimism is particularly high in the ultra-deepwater segment.
Also, activity in the US GoM is set to move higher. In the aftermath of the Macondo incident in the US GoM last April, we have seen increased demand for premium equipment, from both oil and rig companies. There has been a significant increase in enquires and early-stage tenders for ultra-deepwater capacity in recent weeks for the US GoM. We expect several awards ahead.
Following recent updates with various industry participants, it is evident that there continues to be an increase in number of ultra-deepwater requirements coming to the market. Just over the past few weeks, we have seen incremental demand in West Africa, East Africa and South East Asia, in addition to the positive trend in the US GoM.
This supports our view that 2012 ultra-deepwater will soon be very tight and we are likely to see several contract announcements in the coming months. It is also positive that, in enquires, durations are starting to get longer.
Economics attractive at current newbuild price At current dayrates, the economics also look good for newbuilds, in particular ultra-deepwater units, with rates in the mid- to high-USD400k, i.e. above the level needed for a reasonable return on a newbuild today. We estimate that a dayrate in the low USD400k gives a 10% return on total capital, which translates into a 22% return on equity assuming 70% leverage and a cost of debt at 5%. Hence, we view the risk/reward on new rig orders at the current rate as attractive given the potential return.
Potential demand for high-spec jack-ups with new Aldous find Statoil recently announced a mega find, the Aldous Major South discovery in the North Sea, which is estimated to hold 400m–800m barrels of oil equivalent and could be the world’s largest offshore oil find this year. We believe it could add to demand for harsh-environment jack-ups, such as the Gusto MSC CJ70 and Friede and Goldman JU3000N models that have been popular among operators in the North Sea (e.g. Noble Drilling, Seadrill).
UDW market getting very tight, new orders made in this cycle are far from overcrowding the market
Potential return of UDW rig orders a strong trigger for Singapore yards
Activity in US GoM returning – strong market support for UDW activity, especially for semi drilling
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Mid-water semis also high Rig owners commented in recent results briefings that they were seeing an increasingly tight market for mid-water floaters, particularly in the North Sea. Tendering activity here has also picked up of late, with the bulk of new tenders focused in regions such as the North Sea, India and South East Asia. Together, we believe higher activity, tight supply, and new finds (Aldous Major and Avaldsnes discoveries in NCS) could provide the catalysts for an order revival for mid-water harsh-environment semis for Singaporean yards.
Petrobras tender update The Petrobras newbuild rig tender for the remaining 21 rigs has opened in Brazil, in line with expectations that it would close in September. The structure is largely unchanged from previous updates that Petrobras would charter the rigs from Sete and its JV partners or with drilling contractors, which would build the rigs with partnered yards.
Keppel is in the running for six semi-sub rigs (indicative pricing USD800m each).
From the opened bids below, we believe Keppel stands a very good chance of winning 3-4 orders. However, we reiterate the bids are not solely judged by the rate and mobilisation level. There are Net present value considerations in addition to adjustments for technical specification.
We are unable to quantify the valuation impact at this time due to the limited information on rig pricing and terms. And as stated before, potential orders from this tender has not been factored into our model. The orders (if they are semis) may offer a better risk/reward for Keppel as it could leverage on its existing and expanded facilities at Keppel Brafels, which specialises on semi production platforms.
However, we reiterate that building UDW newbuilds in Brazil to meet local content requirements is challenging for yards, due to the lack of existing infrastructure and skilled labour. We would be positive if these contracts were not entirely turnkey-based and have cost escalation clauses that offer some downside protection to the yard. See report dated 4 October for more details.
Bids of 21 rigs tender and our expectations about yard and equipment Drill-ships in JVs with SETE (1.5 derrick)Bidder Day-rate (USD) Mobilization (USD) Likely yard Likely design Likely topside Likely riser Likley BOPEtesco 604,857 31,551,132 Engevix* Gusto P12000 NOV NOV NOVEtesco 604,737 32,118,979 Engevix* Gusto P12000 NOV NOV NOVEtesco 611,797 28,075,235 Odebrecht yard * LMG Marin Aker Aker or Cameron CameronEtesco 609,537 29,288,232 Odebrecht yard * LMG Marin Aker Aker or Cameron CameronEtesco 605,467 28,822,282 Engevix* Gusto P12000 NOV NOV NOVOdebrecht 619,717 28,408,239 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdebrecht 618,597 29,370,610 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdebrecht 621,747 29,922,686 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdebrecht 620,737 30,648,032 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdjfell-Galvao 625,277 28,510,902 Jurong LMG Marin NOV or Aker NOV, Cameron or Aker NOV or CameronOdjfell-Galvao 627,387 29,604,509 Jurong LMG Marin NOV or Aker NOV, Cameron or Aker NOV or CameronOdjfell-Galvao 630,467 30,627,974 Jurong LMG Marin NOV or Aker NOV, Cameron or Aker NOV or CameronSeadrill 628,397 29,003,515 Jurong LMG Marin NOV NOV NOVSeadrill 629,507 30,070,952 Jurong LMG Marin NOV NOV NOVSeadrill 630,587 31,054,485 Jurong LMG Marin NOV NOV NOV* Etesco has bid 3 units at Engevix and 2 at Odebrecht, uncertain which rig is at what yard
Semis in JV with SETEOdebrecht 618,057 32,381,368 Keppel FELS DSS 38E NOV NOV NOVPetroserv 620,817 29,803,804 Keppel FELS DSS 38E NOV NOV NOVPetroserv 626,397 31,094,654 Keppel FELS DSS 38E NOV NOV NOVQueiroz 616,387 30,530,586 Keppel FELS DSS 38E NOV NOV NOVQueiroz 623,937 31,679,166 Keppel FELS DSS 38E NOV NOV NOVQueiroz 612,607 29,129,291 Keppel FELS DSS 38E NOV NOV NOV
Drill-ships (dual activity)Ocean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOV Source: Petrobras, DnB NOR Markets
Recent new order wins, not all gloomy Keppel has announced a couple of contracts over the past two months, despite macro weakness. In August, Transocean exercised an option (with
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remaining two options) worth USD195m (SGD236m) to build a Super B Class high-spec jack-up at Keppel FELS. And the day before, Keppel won SGD146m worth of new FPSO-related contracts from SBM and Rubicon. These were followed by SGD142m worth of production-related conversion orders in late September. In early October, it announced a USD199m (SGD262m) Class B jack-up drilling rig order (we believe to upgrade former West Atlas rig) from Safin Gulf FZCO. We are positive on this contract, as we believe Keppel has purchased the ex-West Atlas rig at an attractive price.
Outstanding options, extensions or lapsing can be expected We expect the extension of options or lapsing of options in the current macro situation. However, we remain comfortable in our base-case that three of the existing six options will turn firm this year or early next year. As mentioned in an earlier note, AOD announced in late September that it had decided not to exercise its remaining newbuild jack-up option (due on 30 September, estimated exercise price USD180m) at Keppel. It was not unexpected even though the option pricing was attractive. Given the current uncertainty in the financial market, it is natural for AOD to focus on securing the remaining funding and contracts for its three existing newbuilds at Keppel and not take up additional financing risk by ordering a fourth rig.
And we have also seen an option being exercised. In early Oct, Ensco's decision to exercise its newbuild Class A jack-up newbuild option is viewed as positive on the 1) pricing (11% higher than Feb's orders), 2) rising market values (option should be in-the-money to warrant exercise), 3) confidence (provides support in current market); and 4) supports our view that the outlook of the high-spec/premium jack-up market remains positive. Pricing is higher than Feb's orders. The price of USD245m is 11% (13% in SGD terms) higher than the USD220m per rig price that Ensco ordered for two Class A jack-ups in Feb 2011. Option price, in theory, should be in-the-money for Ensco to exercise the option. We argue that current market pricing for Class A jack-up newbuild (due delivery 2014) would be higher than USD245m in order to entice Ensco to exercise this option. For the remaining option, Ensco has let the option expired, which we believe the key reason is on risk management from the company's perspective.
And next year, we believe Maersk is likely to exercise its outstanding CJ70 jack-up (estimated price at least USD500m), given the recent development that Maersk is targeting the Statoil's Cat J initiative. We can also expect a slight change in variation order for this unit, as Maersk is believed to be looking at an even larger unit CJ80, capable of drilling water depth of 540-550ft and larger drilling capacity.
Cycle is not over yet, in our view We have not been expecting a super-cycle in orders for the yards, but rather given the fall in yards’ share prices we see a divergence between what the market is discounting and the current cycle. We argue that the oil & gas cycle is longer-term and that oil companies look beyond short-term volatility, as pointed out in our market outlook.
YTD Keppel has secured close to SGD8.6bn of new orders, significantly outperforming its closest competitor SMM’s SGD2.8bn. In our opinion, Keppel will not be desperate for new orders if the pricing is not ideal, and would rather focus on executing the existing backlog.
We expect H2 2011 rig ordering momentum to slow, but we argue that the order rate should still be decent with upcoming tenders.
Our base-case scenario assumes the O&M cycle normalises, with sufficient demand to fill the slots at top-end yards. SMM and KEP are the top rig builders in this market, in our opinion, and we believe they are in a good position to maintain market share in the rig building segment of jack-ups and semis.
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Upcoming potential new order tenders Bid status Project Client Contenders
Bids submittedBrazil flexible pipelaying vessels (up to 6, packages for 1 or 2 vessels) Petrobras
Potential interest, tendering not out yet 5 jackups Saudi Armaco Open (KEP likely to participate)
Potential interest, tendering not out yet 2 jackups CSMC Open (KEP likely to participate)Potential interest, tendering not out yet 1 jackup (CJ70) Rowan Open (KEP likely to participate)
Potential interest, tendering not out yet
1 jackup (Friede & Goldman Super M2 or LeTourneau Super 116E design preferred) Dragon Oil Open (KEP likely to participate)
Potential interest, tendering not out yet 2 semis European Open (KEP likely to participate)Qualified biddders invited - operators and yards Semi production unit Inpex Open (Keppel is likely to partner operators)Potential interest, tendering not out yet 1 540-550ft CJ80 jack-up (large unit) Maersk Open (Keppel is likely to participate)Potential interest, tendering not out yet Cat J drilling semis Statoil Open (Keppel is likely to participate) Source: Upstream, Company, DnB NOR Markets
New orders: estimates and orders secured historically
Outstanding rig options at Keppel and our base case for them to be exercised this year
Date Client Rig typeNo of units
Est value per unit (USDm)
Total value
(USDm)Total value
(SGDm) Remarks25-Jan-2011 Discovery Offshore KFELS Super A class jackup 2 208 416 508 Both expiring in Oct 201110-Feb-2011 ENSCO KFELS Super A class jackup 0 245 245 299 1 options excerised and 1 expired
15-Feb-2011 Maersk Drilling Gusto MSC CJ70 150MD Jackup 1 500 500 610 Expect this to be exercised in 2012
17-Feb-2011 Transocean KFELS Super B class Bigfoot jackup 2 190 380 464 2 options likely to be exercised
23-May-2011 Vision Drilling KFELS B class jackup 1 180 180 225 Expect this to be exercised in Q4 2011Total 6 1721 2105 1 option has lapsedOur base case for 2011e/ early 2012e 3 560 683 No of options we expect to turn firm Source: DnB NOR Markets, company
Replacement ratio of new order intake to revenues (SGDm)
2006 2007 2008 2009 2010 2011 ytd 2011E 2012E 2013ERevenues O&M (excluding est shiprepair) 4858 6178 7776 7337 4705 2,241 4709 5813 5744O&M new order intake 7,300 7,345 5,850 1,674 3,211 8,643 9,635 5,370 5,370Ratio of order intake to revenues booked - replacement ratio 1.5 1.2 0.8 0.2 0.7 3.9 2.0 0.9 0.9
Historical 5-year revenue replacement ratio 0.93-year forward replacement ratio based on our estimates 1.3 Source: Company, DnB NOR Markets
Kreuz Holdings (BUY, TP SGD0.45) Set to benefit from upcoming subsea tenders in Asia Kreuz provides subsea support services to the offshore oil & gas industry, focusing primarily on activities supporting new offshore installation and construction projects, as well as inspection, repair and maintenance (IRM) of existing production and pipeline facilities. Before the IPO in July 2010, Kreuz was a wholly owned subsea service unit of Swiber.
Kreuz functions as a subcontractor, performing subsea services through air-diving and saturation diving operations. Key customers – through main contractors such as Swiber – include Brunei Shell Petroleum, British Gas India, Reliance, ConocoPhilips, Alam Maritim, and Petronas.
It has an outstanding order backlog of USD156m before Q3 recognition.
Divisions • Subsea construction and installation. Provides installations of
pipeline, jacket, riser, spool, remote shutdown valves, decommissioning of platforms, subsea tie-ins and undertakes projects for the stabilisation of pipelines and risers.
• Inspection, repair and maintenance (IRM). Provides services such as subsea support and survey for the stabilisation of existing pipelines, cables, flexi flowlines and risers for remedial purposes. It also provides testing (damage and stability assessments) of offshore structures and pipelines, repair and remedial works on problems reported during inspection surveys.
Assets • 2x accommodation diving support vessels: Swiber Glorious and Swiber
installations, diving support and IRM services in South East Asia and India.
Expected newsflow • Q3 results, which are due out in mid-November. • Potential diving support vessel, diving system, ROV acquisitions. • Potential subsea contract wins.
Valuation Given Kreuz’s small fleet (two vessels), we use a DCF to value the company. Based on this (which is driven by earnings from the existing order backlog and projected contract wins), we value Kreuz at SGD0.46 per share and a target price of SGD0.45. We reiterate our BUY recommendation.
Sector report > Asian Offshore Supply
DnB NOR Markets - 77
17.10.2011
Q3 preview We expect Kreuz to report its Q3 results in mid-November.
We expect no major earnings surprises, and margins will be the key swing factor again, i.e. project execution on the current USD146m backlog. Margins have beaten our forecasts for the past four quarters.
Current backlog to drive earnings, margins are the key swing factor We expect Q3 revenues of USD29m, EBITDA of USD9m, EBIT of USD8m, and net income of USD7m. We forecast a Q3 EBITDA margin of 30%, compared to the 33% average between Q3 2010 and Q2 2011.
Q3 preview USDm Q2/11 Q3/11E Q3/11E
Reported DnB NOR Cons* 2011E 2012E 2013E
Operating revenues 54.4 29.3 na 132 136 147EBITDA 18.3 8.9 na 43 37 37EBITDA margins 34% 30% 32% 27% 25%EBIT 16.6 8.4 na 39 33 33Net f inance -0.3 -0.3 na -1 -1 0Pretax earnings 16.3 8.1 na 38 33 33Net result 14.0 6.8 na 32 27 27
EPS 0.03 0.01 na 0.06 0.05 0.05
Full-year figures (DnB NOR)
Source: DnB NOR Markets, Company
Orderbook status The current order backlog is USD146m. Swiber-related contracts account for 35% of the orderbook.
Existing subsea projects backlog
Location Scope of Work Client Contract period
Est outstanding
value (USDm)
Thailand Installation of jacket, pile, topside and pipelines Swiber 2009-2013 8Brunei Inspection, repair and maintenance services of offshore platforms Shell 2010-2014 51East Asia Subsea installation - Q22011-Q32011 2SEA and South Asia Subsea installation Swiber Q22011-Q22012 16Indonesia and Thailand Various subsea work - Q22011-Q32012 10Indonesia and Thailand Various subsea work Swiber Q22011-Q32012 27Middle East Subsea installation (Optional associated works worth USD10m not included yet) - Q32011-Q22012 25East Asia Subsea installation works - Q42011-Q22012 6Total outstanding backlog 146 Source: DnB NOR Markets, Company
New order assumptions We expect Kreuz to secure new orders worth USD131m for 2011e (USD100m secured YTD), USD170m for 2012e and USD175m for 2013e.
New order assumptions In USDm Q1/11 Q2/11 Q3/11E Q4/11E 2011E 2012E 2013EHistorical/current orderbook at period end (USDm) 110 146 157 157 157 191 220New orders flow assumed/ secured (historical) 68.80 31.23 - 100.03 - -New EPCIC order assumptions 40 23 131 170 175 Source: DnB NOR Markets
Sector report > Asian Offshore Supply
DnB NOR Markets - 78
17.10.2011
Valuation and recommendation Given Kreuz’s small fleet (two vessels), we use a DCF to value the company. Based on this (which is driven by earnings from the existing order backlog and projected contract wins), we value Kreuz at SGD0.46 per share. We reiterate our BUY recommendation.
DCF valuation – SGD0.46/share Discounted value of free cashflow Calculation of WACCValue free cashflow 2011-2035 (USDm) 191 Market value equity (2011) 129Value free cashflow 2035+ (USDm) 18 - in % 85%Total value free cashflow (USDm) 208 Net interest bearing debt (2011) 22Net debt 2010 (USDm) 22 - in % 15%Net value free cashflow (USDm) 186FCFE per share (USD) 0.37 Risk premium 9%Total value per share (SGD @USDSGD 1.24) 0.46 Beta 1.0
Upside/ (Downside) 52%Risk free rate 4%
Terminal Growth Assumptions Interest rate 5%Nominal growth year 2035+ 2.0% Tax-rate 17%Factor 10.5 Net WACC 12% Source: DnB NOR Markets Estimates
KS Energy (BUY, TP SGD1.22) Distribution business offers steady income stream KS Energy (KSE) is a leading one-stop energy services provider to the global oil & gas, marine and petrochemical industries. Core activities include distribution and capital equipment (jack-up drilling rigs, land rigs, liftboat) charter and services. In the distribution business, KSE ranks as one of the leading distributors of oil & gas equipment, spare parts, consumables and industrial products in the region. It holds sole distributorships in several well-established brands in the industry. KS Distribution (combination of Aqua-Terra and SSH) distributes more than 60,000 oil & gas related products comprising more than 140 international brands. In the capital equipment business, following the acquisition of Norway’s Atlantic Oilfield Services (AOS) in May 2007, KSE has the capability to supply and operate capital equipment, including onshore and offshore rigs. Integrating the twin capabilities of AOS and KSE’s drilling support teams, it can provide a full suite of services directly to oil & gas companies, tendering for drilling contracts in the market.
Divisions • Rig capital equipment (drilling) services. Provides onshore and
offshore drilling services by chartering its fleet of jack-ups, land rigs, and offshore services in accommodation jack-up and jack-up liftboat.
• Distribution services. Distributes more than 60,000 oil & gas related products, comprising more than 140 international brands.
accommodation jack-up, 1x jack-up liftboat (50% stake), 8x land drilling rigs, and 2x newbuild jack-ups.
• Intangible – distribution rights and networks.
Recent developments • Entry into the Indonesia drilling market – on 21 July it secured a USD32m,
four-year contract to provide workover and well services to an undisclosed major, commencing end-September. On 12 July it partnered NOC-backed PT Pertamina Drilling Services in a USD98m, 42-month drilling deal, commencing Q3 2012e.
• On 14 July it announced its distribution segment had secured a SGD70m contract to supply components for the construction of two jack-up rigs. While details were not given, we believe the Chinese shipyard could be Cosco Shipyard, which is building two of KS’s LeTourneau Workhorse 240C class jack-ups ordered in May, scheduled for delivery in Q3 2013 and Q1 2014, respectively.
• KS secured a USD14m 1+1 year contract for the land rig KS Discoverer 3 with BP Pakistan E&P in late September.
Expected newsflow • Q3 results, which are due out in mid-November. • Further streamlining of fleet.
Valuation Our NAV is SGD1.22 per share. We reiterate our BUY recommendation and SGD1.22 target price.
Sector report > Asian Offshore Supply
DnB NOR Markets - 82
17.10.2011
Q3 preview We expect KS Energy (KSE) to report its Q3 results in mid-November.
Earnings recovery expected in Q3 We expect Q3 to be up both QOQ and YOY, with revenues of SGD124m, EBITDA of SGD19m, net income of SGD5m, and EPS of 0.012. We expect the distribution business to provide a stable income source. In the capital equipment business, key focus is on the contracting status and overheads for the idling land rigs.
Q3 preview SGDm Q2/11 Q3/11E Q3/11E Chg y/y % Chg
Reported DnB NOR Cons* 2011E 2012E 2013E 2011E 2012E 2013E
Operating revenues 122.8 123.5 na 0.7 1% 511 649 708 499 573 naEBITDA 10.9 18.6 na 7.7 70% 61 117 135 62 94 naEBITDA margin 9% 15% 12% 18% 19% 12% 16% -EBIT 2.2 9.9 na 7.7 347% 25 81 97 16 54 naNet f inance -3.8 -3.5 na 0.3 n.m -15 -15 -16 - - -Pretax earnings -0.9 8.2 na 9.1 n.m 11 72 88 1 40 naNet result -5.5 5.2 na 10.7 n.m -1 51 64 -3 27 na
EPS -0.013 0.012 na 0.0 n.m 0.00 0.12 0.15 -0.007 0.064 na
EBITDA breakdownDistribution Business 6 8 7 13 33 8 8 9 10 35 43 45Drilling, Capital equipment and related services 14 5 1 3 23 1 3 10 11 26 74 90
EBIT breakdownDistribution Business 5 7 5 12 29 7 6 7 9 31 38 40Drilling, Capital equipment and related services 7 -4 -7 -6 -10 -6 -4 2 4 -4 43 56 Source: DnB NOR Markets Note: For quarterly results, KS provides a breakdown only of divisional revenues
Contract status of key capital equipment fleet Asset Name Asset Type Specifications Current Status Estimated
Dayrates (USD)
Contract Start
Contract End
KS Medstar I Jackup Rig Mitsui 200-C 45 design, 300ft, Built in 1980, 1.3m lbs
3+1y term charter with Petrobel off Egypt. Regular overhaul and maintenance scheduled for in Q2/Q3
Apr-08 Apr-12
KS Endeavor Jackup Rig Friede & Goldman Super M2, 300ft, Built in 2010, 1.6m lbs
2+1y bareboat Charter with Chevron off Nigeria, West Africa from Q4 2010
46,000 Jan-11 Dec-13
Atlantic Rotterdam Accom Jackup IHC Gusto BV, 250ft, Built in 1975 (Hull), Accom for 140 men
Went through maintenance and upgrades at the GDANSK Shipyard in Poland. Working on a 1+1y bareboat charter with Shell off the UK sector of the North Sea on the 1 August 2011.
23,800 Aug-11 Jul-13
Titan 2 (50-50 owned with Sinwa)
Liftboat 200ft, Built in 2008, 300ton lifting cranes 4+4+4mth Bareboat Charter with GMT Energy Resources (for ExxonMobil) off Nigeria, West Africa
26,300 Jan-11 Jan-12
Yu Song (equipment drylease) Jackup Rig 300ft, Built in 1976 7y bareboat charter of equipment rental with COSL off Bohai Bay, China
- Jun-05 May-12
KS Challenger 1 Land Rig Built in 2007, 1300HP Available for sale - - -KS Challenger 3 Land Rig Built in 2007, 1300HP Available for sale - - -Discoverer 1 Land Rig Built in 2008, 1500HP 2+1y term charter with GKPI Kurdistan in Kurdistan, Iraq 34,000 Aug-10 Aug-11Discoverer 2 Land Rig Built in 2008, 1500HP Charter with PERENCO Tunisia in Tunisia, Africa - Mar-11 Jun-11Discoverer 3 Land Rig Built in 2007, 1500HP Stacked in Karachi, Pakistan. Available for work - - -Discoverer 4 Land Rig Built in 2008, 2000HP 6+6mth charter with GKPI Kurdistan in Kurdistan, Iraq 36,000 Mar-11 Sep-11Indonesian newbuild 1 Land Rig Newbuild 5-year drilling contract with Chevron, DURI in Indonesia 18,500 Jun-11 Jun-16Indonesian newbuild 2 Land Rig Newbuild 5-year drilling contract with Chevron, DURI in Indonesia 18,500 Jun-11 Jun-16 Source: Company, DnB NOR Markets
Share price has held up better than peers KS shares are down 6.6% since the August sell-down, compared to its offshore Asian peers’ 34%. We believe the outperformance could be due to the recent takeover offer by management and relatively low trading volume.
Recent land rig contract positive on utilisation KS secured a USD14m 1+1 year contract for the land rig KS Discoverer 3 with BP Pakistan E&P in late September. This was positive, as the KS Discoverer 3 had been stacked in Pakistan awaiting work, although this was offset partially by the lower than expected dayrate secured on the land rig (USD19k, we estimated USD25k).
Sector report > Asian Offshore Supply
DnB NOR Markets - 83
17.10.2011
Indonesia, new growth market We expect growing business opportunities in Indonesia, in both drilling and well services. Underlining this, KS won two contracts in Indonesia in July. On 21 July, it secured a USD32m, four-year contract to provide workover and well services to an undisclosed major, commencing end-September. On 12 July, KS partnered NOC-backed PT Pertamina Drilling Services in a USD98m, 42-month drilling deal, commencing Q3 2012e. This is positive, in our view, as it may open the door to further opportunities with PT Pertamina Drilling Services in Indonesia. Although details are limited, we believe it is onshore-based, with new land rigs working on the contracts.
Recent contract wins in distribution segment On 14 July, KS announced its distribution segment had secured a SGD70m contract to supply components for the construction of two jack-up rigs. While details were not given, we believe the Chinese shipyard could be Cosco Shipyard, which is building two of KS’s LeTourneau Workhorse 240C class jack-ups, scheduled for delivery in Q3 2013 and Q1 2014, respectively.
Jack-up newbuilds, a significant earnings driver, but only in 2014 As highlighted in our note dated 27 May, KS’s high-spec jack-up orders should place it in a stronger position in the shallow-water drilling market niche. With the addition of these two jack-ups, its jack-up drilling fleet would double to four. While still a small portfolio compared with established drillers, KS would be one of the few Asian companies with good exposure here.
In our opinion, the pricing of these newbuilds looks relatively decent with payment terms from a reputable Chinese yard, Cosco Shipyard. Management is guiding annual revenues from each jack-up of SGD68m (based on rates of USD150k/day) and EBITDA of SGD34m.
We have modelled in a payment schedule based on a 20% upfront payment this year, with the remaining 80% due in 2013. Based on these assumptions, we expect the initial 20% downpayment of USD78m to be partially funded by Itochu’s USD50m investment in KS Drilling, with the rest to be met through internal cash flow. For the remaining 80%, we argue that KS would have to secure termcharters for these newbuilds during the construction lead time to obtain financing from banks or access the capital markets, without paying high premiums.
Valuation of jack-up newbuilds We adopt a conservative approach in evaluating the NAV of the newbuild jack-ups. Our NPV of the free cash flow is based on long-term average rate of USD150k/day, opex of USD75k/day, a tax rate of 10% and annual reinvestment on a maintenance basis (depreciation). Recent contracts in the high-spec rig segment have been at USD150k–200k/day, which would suggest our valuation of the jack-ups could well be on the low side (up to USD250m) if we apply a dayrate at the higher end of the range. For now, we use the lower end of the current rate spectrum, not factoring in any change in forward dynamics in demand and supply, for which we see upside potential.
Sector report > Asian Offshore Supply
DnB NOR Markets - 84
17.10.2011
Valuation and recommendation We believe that investor focus over the coming months will be on earnings. We believe the earnings recovery story (as reflected in Q2 performance, although the recovery was slower than expected) is intact, supported by improving operating performance. Fleet utilisation in the capital equipment business remains the key swing factor in earnings, while the distribution business continues to provide earnings support. We expect KS to turn profitable (on a net basis) in H2.
Our NAV is SGD1.22 per share. We reiterate our BUY recommendation and target price of SGD1.22.
Fleet NAV – SGD1.22/share
Type Location ClientYard built
Year built/ refurbished Status
Ownership Avg size
Costper vessel
(USDm)FMV
(USDm)X rate
(USD/SGD)
FMV per vessel
(SGDm)
Total net value
(SGDm)1 KS Medstar-1 Jack-up drilling rig Egypt Petrobel Japan 2008 Term charter 80% 300ft 120 110 1.2 136 1092 KS Endeavor Jack-up drilling rig Africa - MIS Sharja 2010 Bareboat 40% 300ft 180 160 1.2 198 793 Atlantic Rotterdam Accommodation jack-up Denmark - - 2004 Docking 100% 250ft 85 65 1.2 81 814 Yu Song Jack-up drilling rig China COSL Dalian Shi 2003 Drylease equip 100% 300ft 56 0 1.2 0 05 Titan 2 Jack-up liftboat Nigeria GMT - 2009 Available 40% 200ft 60 60 1.2 74 306 KS Challenger 1 Landrig US - - 2007 Available for sale 40% 1300 HP 20 10 1.2 12 57 KS Challenger 3 Landrig US - - 2007 Available for sale 40% 1300 HP 20 10 1.2 12 58 Discoverer 1 Landrig Kurdistan GKPI Kurdistan - 2008 Term charter 80% 1500 HP 25 18 1.2 22 189 Discoverer 2 Landrig Dubai - - 2008 Available 80% 1500 HP 25 18 1.2 22 18
10 Discoverer 3 Landrig Pakistan - - 2007 Available 80% 1500 HP 25 18 1.2 22 1811 Discoverer 4 Landrig Kurdistan GKPI Kurdistan - 2008 Term charter 80% 2000 HP 28 18 1.2 22 1812 Esbjerg Jack-up drilling rig Denmark Maersk Drydocks 2005 MC with Prosafe 0% 250ft - 0 1.2 0 013 KS Explorer Seismic vessel - - - - Sold 0% - 30 0 1.2 0 014 Discoverer 6 Landrig Indonesia - - 2011 Term charter 48% 1000 HP 15 15 1.2 19 915 Discoverer 7 Landrig Indonesia - - 2011 Term charter 48% 1000 HP 15 15 1.2 19 916 Newbuild Jack-up drilling rig China - Cosco 2013 Newbuild 80% 400ft 194 198 1.2 246 19717 Newbuild Jack-up drilling rig China - Cosco 2014 Newbuild 80% 400ft 194 198 1.2 246 197
Total fleet value - - - - 791Distribution business, 10x 2011E EBITDA, 56% ownership 206Other financial assets - - - - 60Total asset values - - - - 1057NIBD (2011E) + future known capex - - - - 559Adj NIBD 559Equity value (SGDm) - - - - 498No of shares outstanding incl 59mn share issue related to acquisitions - - - - 407NAV per share 1.22
Source: DnB NOR Markets Note: Given our price target of SGD1.22, we do not expect conversion of the convertible bonds
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
KS Energy
Rebased price (12m, SGD)
40
50
60
70
80
90
100
110
120
130
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
KS Energy
Rebased consensus average forward EPS (12m, SGD)
0
100
200
300
400
500
600
700
800
2007 2008 2009 2010 2011e 2012e 2013e-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Revenue (SGDm) Revenue Growth
Revenue GrowthRevenue (SGDm)
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
2007 2008 2009 2010 2011e 2012e 2013e0.00
0.02
0.04
0.06
0.08
0.10
0.12
EPS (SGD) DPS (SGD)
DPS (SGD)EPS (SGD)
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 2011e 2012e 2013e0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
EBITDA (SGDm) EBITDA margin
EBITDA marginEBITDA (SGDm)
-300
-250
-200
-150
-100
-50
0
50
100
2007 2008 2009 2010 2011e 2012e 2013e0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
FCF (SGDm) Dividend yield
Dividend yieldFCF (SGDm)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2007 2008 2009 2010 2011e 2012e 2013e-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Price/Book ROE
ROEPrice/Book
Sector report > Asian Offshore Supply
DnB NOR Markets - 87
17.10.2011
DnB NOR Markets is compensated by SGX under the SERI (SGX Equity Research Insights) Sector Model for coverage of this company. The content, estimates and recommendation are solely based on DnB NOR Markets own independent judgement and the compensation is not dependent on this
Otto Marine (SELL, TP cut to SGD0.12) Moving up the OSV value chain; yet to reap rewards Otto Marine is an offshore marine group engaged in shipbuilding, ship repair and conversion, and ship chartering, with a focus on complex, sophisticated and environment friendly offshore support vessels. It owns 30 offshore support vessels (OSVs) in its chartering fleet. It also owns 11 vessels with strategic partnerships tie-ups. It provides shipbuilding (including turnkey projects) and ship-repair services from its well-equipped and strategically located Batamec Shipyard in Indonesia.
The current shipbuilding order book stands at SGD192m as of Q3, dominated by three large AHTS for Mosvold Supply and one OCV for Norshore.
Divisions • Fleet (ship chartering):
o Own chartering fleet. o Chartering fleet with strategic partnerships.
• Yard (shipbuilding and ship repair).
Assets • Chartering fleet (owns 100%). 30 offshore support vessels (see fleet
list). • Fleet with strategic partnerships (owns 35–49%). 11 offshore
support vessels (see fleet list). • Yard assets. Facilities in Batamec Shipyard, Indonesia: 145x40x7m
drydock with overhead crane, Syncrolift, covering 26,000m2, with 650m wharf length.
• Seismic operations. Reflect Geophysical.
Recent developments • Cancellation of the third Mosvold AHTS vessel. So far Mosvold Supply has
cancelled three of the four AHTS newbuilds with OTML. For the last AHTS order, we reiterate that successful completion and delivery would be the key for Mosvold to take delivery. The expected official cancellation date for this vessel is 27 January 2012, according to Mosvold’s Q1 report.
• In mid-September, OTML announced two 12,000bhp AHTS newbuilds (total USD77m) from Go Marine. In the same month, OTML entered into a sale agreement with Go Marine for the sale of its 8,000bhp AHTS Go Rigel for USD24m.
• Further discussions to extend the LOI for the AHTS Deep Sea 1. • OTML, Go Offshore (Go Marine subsidiary) and OCBC entered an indicative
term sheet in September, related to a proposed mezzanine loan of up to USD20m by OCBC to Go Offshore.
Expected newsflow • New chartering contracts in the region. • Newbuild ordering activity. • New seismic contracts in the region. • The Q3 results are due out in November.
Valuation Our base-case NAV is SGD0.14, and we believe OTML should trade at a discount (we use 15%) to NAV due to the potential negative triggers ahead. We have reduced our target price from SGD0.14 to SGD0.12, and we reiterate our SELL recommendation.
Sector report > Asian Offshore Supply
DnB NOR Markets - 88
17.10.2011
Q3 preview OTML is expected to report its Q3 results in November.
We expect marginal losses in Q3 due to the profit reversal of the third cancelled Mosvold AHTS. Potential upcoming negative triggers include: 1) order book risk; 2) cash burn cycle against a highly geared balance sheet; 3) lack of new order visibility against a fast-declining order book; and 4) execution risk in the seismic segment. Based on current order book estimated at SGD192m, revenue coverage is estimated at five months on an average three-year historical order run-rate of SGD444m annually. Hence, we expect a steep decline in forward revenues due to a book to bill below 1.
Marginal losses expected due to profit reversal We expect Q3 revenues of SGD78m, EBITDA of SGD6m, EBIT of SGD2m, net losses of SGD1m (an improvement from the SGD38m loss in Q2) and EPS of SGD-0.001. Marginal losses are expected as we expect OTML to reverse the profits accumulated from third Mosvold AHTS vessel order in Q3. The vessel was cancelled in July.
Quarterly consensus is not available, but in terms of full-year estimates, we are significantly below consensus – we forecast a loss of SGD31m and consensus is for net income of SGD7m.
Q3 preview SGDm Q2/11 Q3/11E Q3/11E Chg y/y % Chg
Reported DnB NOR Cons* 2011E 2012E 2013E 2011E 2012E 2013E
Operating revenues 41.7 78 na 36.0 86% 329 298 333 383 371 396EBITDA after common exp -33.3 5.7 na 39.0 n.m -7 52 57 25 56 61EBITDA margin -80% 7% - - - -2% 18% 17% 7% 15% 15%EBIT -36.5 1.9 na 38.4 n.m -22 38 42 10 46 53Net f inance -4.5 -5.7 na -1.1 n.m -21 -23 -27 - - -Pretax earnings -40.6 -1.7 na 38.9 n.m -36 24 25 6 36 46Net result -38.3 -1.3 na 37.0 n.m -31 21 21 7 34 43
EBITDA marginShipbuilding 16% -390% 8% 8% -4% 12% 11%Shiprepair and Conversion na na 35% 35% 35% 45% 55%Chartering 80% 74% 65% 65% 70% 65% 67%Seismic -43% -7% -5% 12% -9% 15% 15%Subsea services (one vessel) 34% 7% 15% 15% 19% 15% 15% Source: Company data, DnB NOR Markets Note: EBITDA is before unallocated common expenses such as SG&A
Cash burn cycle continues Q2 operating cash flow was SGD-79m, affected by the operating losses and negative working capital. We continue to expect cash burn until the remaining vessels in the order book are delivered and the cancelled newbuild vessels (under inventories) are sold or chartered out. We expect the second and third cancelled Mosvold vessels to be completed in H1 2012.
Balance sheet, highly geared OTML is highly leveraged, with end-Q2 debt of SGD737m (up from Q1’s SGD644m) on its balance sheet, of which SGD320m was short-term. Net debt was SGD737m (up from Q1’s SGD523m), or SGD818m (Q1: SGD621m) adjusted for the SGD81m restricted cash (overdraft, refund guarantees and shipbuilding contracts). Q2 net gearing was 1.44x; up from Q1’s 1.14x.
Sector report > Asian Offshore Supply
DnB NOR Markets - 89
17.10.2011
We have not ruled out the possibility of a debt covenant breach and that the company might have to sell its vessels to improve its balance sheet strength.
Recent contract developments, related mainly to Go Marine In mid-September, OTML announced two 12,000bhp AHTS newbuilds (total USD77m) from Go Marine. This was the first contract win since 2010. However, we argue this is a ‘left pocket to right pocket’ deal, as OTML owns a 19% direct stake in Go Marine, with an option to fully own the company. In any case, the SGD94m order win would form part of the 2011e new order estimate of SGD155m. We are neutral on the deal and would have deemed it positive for the yard if it were not for the related party transaction. We do not expect material changes to the yard’s cash flow, as Go Marine's funding is likely to be backed by OTML.
And shortly before the AHTS newbuild orders, OTML entered into a sale agreement with Go Marine for the sale of its 8,000bhp AHTS Go Rigel. The sale value of USD24m was slightly above our NAV estimate of USD22m. The sales transaction was due to have completed by September 2011. We expect OTML to book a gain of USD6m (SGD7.2m). However, we do not regard this as economic profit, but rather as a one-off. Hence, there is no change to our core 2011e EPS.
Background of Go Marine Go Marine is a privately owned Australian vessel owner and fleet management company headquartered in Perth, Western Australia. It has a fleet (including managed vessels) of barges, AHTS, PSV, ROV support vessels and DSVs operating in the North West Shelf and the Timor Sea. It has been a long-term JV partner with OTML. OTML announced in February 2011 that it had entered into a convertible loan agreement with Go Marine, where the loan can be converted into 49% of shares of Go Marine. In the latest update, OTML holds 19% equity interest in Go. OTML also has the option, which expires in March 2012, to fully own Go Marine.
Go Offshore raises USD20m mezzanine loan Otto Marine, Go Offshore and OCBC entered into an indicative term sheet in September in relation to a proposed mezzanine loan of up to USD20m by OCBC to Go Offshore. Go Offshore is a wholly owned subsidiary of Go Marine. The loan’s maturity is 36 months from first drawdown but is repayable ahead of maturity, in the event of: 1) an IPO of Go Offshore or listing vehicle; or 2) the sale or transfer of all or most of the assets of Go Offshore. The loan structure includes options for OCBC to subscribe for new ordinary shares in Go Offshore or its listing vehicle up to USD20m, which is the size of the facility. Otto Marine guarantees the mezzanine loan and undertakes to become and remain largest owner of Go Marine. So far there has been a relatively muted impact on Otto Marine, as details (structure and subordination) are sketchy.
Further discussion to extend LOI agreement for Deep Sea 1 Otto Marine announced in late September that it was still in discussions with the buyer for an extension of time to pay the initial 10% deposit of USD9m. This is required for the execution of the USD90m LOI for the sale of the AHTS vessel Deep Sea 1, announced in August. OTML had agreed to extend the buyer’s request for an extension of 14 days, from 13 September (due 27 September), to pay the initial deposit. We are not surprised by the possibility of a further extension as the LOI is believed to be conditional upon Deep Sea 1 locking in a long-term charter. We argue that it will be negative for OTML if the LOI does not go through. See our notes dated 15 August and 14 September for more details.
Order book now stands at SGD192m Including the recent new contract win of 2x 12,000bhp AHTS from Go Marine, and assuming OTML’s stake in Go Marine remains at 19%, the order book is estimated at SGD192m. Based on this, the revenue coverage is estimated at five months on an average three-year historical order run-rate of SGD444m annually. Hence, we expect a steep decline in forward revenues due to a book to bill below 1.
Total 192 100% Source: Company data, DnB NOR Markets
Last Mosvold vessel remaining So far Mosvold Supply has cancelled three of the four AHTS newbuilds with OTML. For the last AHTS order, we reiterate that successful completion and delivery of this vessel would be the key for Mosvold to take delivery. The expected official cancellation date for this vessel is 27 January 2012, according to Mosvold’s Q1 report.
Subdued outlook for new orders New orders are still a relevant share price trigger in our view, but we argue that focus will be on the margins of new orders (assuming they are high-spec).
New order estimates In SGDm 2006 2007 2008 2009 2010 2011 YTD 2011E 2012E 2013ENewbuild orders** (historical) 541 606 522 83 na 95 95 na naAHTS/ AHT na na na 0 0 95 45 130 130PSVs na na na 0 0 0 60 60 120Utility vessel na na na 0 0 0 0 15 15Offshore construction vessel na na na 0 0 0 50 100 100Accomodation work barge na na na 0 0 0 0 40 40Total estimated orders 155 345 405 Source: DnB NOR Markets
Share purchases by founder not significant Since August, OTML’s founder Yaw Chee Siew has bought around 4.33m shares in OTML, taking his stake to 63.6% (from 63.4%). Though this initiative signals support by the owner, we argue it was not a significant absolute dollar amount (estimated at SGD0.65m).
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Valuation and recommendation Our base-case NAV values OTML at SGD0.14 per share, and we believe it should trade at a 15% discount to NAV due to the potential negative triggers ahead. We have reduced our target price from SGD0.14 to SGD0.12, and we reiterate our SELL recommendation.
‘Bear-case’ valuation – focus on floor value We have carried out a bear-case NAV analysis to derive a theoretical floor price. In this, our NAV is SGD0.09 per share.
‘Bear-case’ NAV of OTML’s fleet (own + strategic partnerships) of SGD0.09/share Own chartering fleet
No Type Contract Region Yard built Contract type Delivery AgeNAV
(USDm)Ex
rateNAV
(SGDm)Owner
ship 1 Tug Vessel 3600 dwt Under nego Middle East Malaysia Time charter 2007 4 3 1.24 3 100%2 Tug Vessel 3600 dwt Under nego Middle East Malaysia Time charter 2007 4 3 1.24 3 100%3 Tug Vessel 3600 dwt Under nego Middle East Malaysia Time charter 2007 4 3 1.24 3 100%4 Tug Vessel 3600 dwt Under nego - Malaysia Time charter 2008 3 3 1.24 3 100%5 Tug Vessel 3600 dwt Under nego - Malaysia Time charter 2008 3 3 1.24 3 100%6 Barge 10000 dwt Chartered Middle East Batam Time charter 2007 4 3 1.24 3 100%7 Barge 10000 dwt Chartered Middle East Batam Time charter 2007 4 3 1.24 4 100%8 Barge 10000 dwt Chartered Middle East Batam Time charter 2008 3 3 1.24 4 100%9 Barge 10000 dwt Under nego - Batam Time charter 2008 3 3 1.24 4 100%
10 Barge 10000 dwt Under nego - Batam Time charter 2008 3 3 1.24 4 100%11 Maint. work vessel 61 m Chartered Asia Pacific China Bareboat 2009 2 13 1.24 16 100%12 AHTS 10800 bhp Chartered Australia Batamec Bareboat 2009 2 28 1.24 35 100%13 AHTS 10800 bhp Chartered Australia Batamec Bareboat 2009 2 28 1.24 35 100%14 AHTS 6000 bhp Chartered Asia Pacific Batamec Bareboat 2009 2 14 1.24 17 100%15 Maint. work vessel 61 m Chartered Malaysia China Bareboat 2009 2 13 1.24 16 100%16 Work barge 300 pax Available - China Available 2009 2 27 1.24 33 100%17 AHTS 6000 bhp Chartered Asia Pacific China Bareboat 2009 2 14 1.24 17 100%18 40M AHT 3600 bhp Under nego - China Available 2009 2 7 1.24 9 100%19 40M AHT 3600 bhp Under nego - China Available 2009 2 7 1.24 9 100%20 40M AHT 3600 bhp Available - China Available 2010 1 8 1.24 10 100%21 40M AHT 3600 bhp Available - China Available 2010 1 8 1.24 10 100%22 MT 6009L - MFSV 3200 dwt Contract Europe Batamec Contract 2010 1 32 1.24 40 100% 60% 24 1623 6 streamer seismic PSV 3200 dwt Sesmic ops - Batamec Sesmic ops 2010 1 50 1.24 62 100%24 AHTS 10000 bhp Available - Batamec Available 2010 1 29 1.24 36 100% 70% 25 1125 AHTS 10000 bhp Available - Batamec Available 2010 1 29 1.24 36 100% 70% 25 1126 AHTS 6000 bhp Chartered Europe China Chartered 2009 2 14 1.24 17 100% 70% 12 527 AHTS 6000 bhp Chartered Europe China Chartered 2009 2 14 1.24 17 100% 70% 12 528 Mos cancelled AHTS Deep Sea 1 21000 bhp Available - Batamec Available Q111 - 75 1.24 93 100%29 MT 6009 - MFSV 3200 dwt Contract Europe Batamec Contract 2009 - 28 1.24 35 100% 60% 21 1430 MT 6009L - MFSV 3200 dwt Sold Australia Batamec Sold Q210 - 32 1.24 0 0% 60% 0 031 AHTS 8000 bhp Available - China Available Q410 - 22 1.24 27 100%32 Multi-support subsea vessel 292 ft Hired US - Project - - 50 1.24 12 19%33 Mosvold's cancelled AHTS 21000 bhp Newbuild - Batamec Newbuild Q111 - 73 1.24 91 100%34 Mosvold's cancelled AHTS 21000 bhp Newbuild - Batamec Newbuild Q312 - 72 1.24 89 100%
Total 714 796
Chartering fleet with strategic partners
No Type Contract Region Yard built Contract type Delivery AgeNAV
(USDm)Ex
rateNAV
(SGDm)Owner
ship funding on ves
Debt (SGDm)
NAV Otto
1 AHTS 5150 bhp Chartered Australia China Bareboat 2009 - 12 1.24 15 49% 70% 10 22 AHTS 5150 bhp Chartered Australia China Bareboat 2009 - 12 1.24 15 49% 70% 10 23 AHTS 5150 bhp Chartered Australia China Bareboat 2009 - 12 1.24 15 49% 70% 10 24 Work barge 300 pax Chartered Asia Pacific Batamec Time charter Q407 - 27 1.24 33 49% 30% 10 115 57.5m- AHTS 5150 bhp Contract Europe China Contract Q309 - 12 1.24 15 45% 70% 10 26 Work barge 300 pax Contract Europe China Contract 4Q09 - 27 1.24 33 49% 70% 23 57 AHTS 8000 bhp Newbuild - Batamec Sold Q211 - 22 1.24 27 0% 70% 19 08 AHTS 8000 bhp Newbuild - Batamec Sold Q411 - 22 1.24 27 0% 70% 19 09 AHTS 8000 bhp Newbuild - Batamec Newbuild Q112 - 21 1.24 26 49% 70% 18 4
NAV Calculation SGDm MethodNAV of own chartering fleet 796 Fair mkt valueNAV of fleet with strategic partnerships 39 Fair mkt valueNAV of yard 91 5x 2012 EV/EBITDA 6 to 5 0.09814 0.902Total assets 9252010 NIBD + future capex 826Value of WC end 2011 & 2012 80 Assumption: Long term WC need of SGDm 80NAV of all assets 179No of outstanding shares post equity issue 1890Equity value per share (SGD) 0.09
Size
Size
Source: DnB NOR Markets
‘Base-case’ valuation Even though our base-case NAV is SGD0.14, we believe OTML should trade at a 15% discount to NAV due to the potential negative triggers ahead.
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NAV of Otto Marine’s fleet (own + strategic partnerships) of SGD0.12/share
No Type Contract Region Yard built Contract type Delivery AgeNAV
(USDm)Ex
rateNAV
(SGDm)Owner
ship 1 Tug Vessel 3600 dwt Under nego Middle East Malaysia Time charter 2007 4 3 1.24 4 100%2 Tug Vessel 3600 dwt Under nego Middle East Malaysia Time charter 2007 4 3 1.24 4 100%3 Tug Vessel 3600 dwt Under nego Middle East Malaysia Time charter 2007 4 3 1.24 4 100%4 Tug Vessel 3600 dwt Under nego - Malaysia Time charter 2008 3 3 1.24 4 100%5 Tug Vessel 3600 dwt Under nego - Malaysia Time charter 2008 3 3 1.24 4 100%6 Barge 10000 dwt Chartered Middle East Batam Time charter 2007 4 3 1.24 4 100%7 Barge 10000 dwt Chartered Middle East Batam Time charter 2007 4 3 1.24 4 100%8 Barge 10000 dwt Chartered Middle East Batam Time charter 2008 3 3 1.24 4 100%9 Barge 10000 dwt Under nego - Batam Time charter 2008 3 3 1.24 4 100%
10 Barge 10000 dwt Under nego - Batam Time charter 2008 3 3 1.24 4 100%11 Maint. work vessel 61 m Chartered Asia Pacific China Bareboat 2009 2 15 1.24 19 100%12 AHTS 10800 bhp Chartered Australia Batamec Bareboat 2009 2 30 1.24 37 100%13 AHTS 10800 bhp Chartered Australia Batamec Bareboat 2009 2 30 1.24 37 100%14 AHTS 6000 bhp Chartered Asia Pacific Batamec Bareboat 2009 2 16 1.24 20 100%15 Maint. work vessel 61 m Chartered Malaysia China Bareboat 2009 2 15 1.24 19 100%16 Work barge 300 pax Available - China Available 2009 2 30 1.24 37 100%17 AHTS 6000 bhp Chartered Asia Pacific China Bareboat 2009 2 14 1.24 17 100%18 40M AHT 3600 bhp Under nego - China Available 2009 2 8 1.24 10 100%19 40M AHT 3600 bhp Under nego - China Available 2009 2 8 1.24 10 100%20 40M AHT 3600 bhp Available - China Available 2010 1 8 1.24 10 100%21 40M AHT 3600 bhp Available - China Available 2010 1 8 1.24 10 100%22 MT 6009L - MFSV 3200 dwt Contract Europe Batamec Contract 2010 1 38 1.24 47 100% 60% 28 1923 6 streamer seismic PSV 3200 dwt Sesmic ops - Batamec Sesmic ops 2010 1 70 1.24 87 100%24 AHTS 10000 bhp Available - Batamec Available 2010 1 32 1.24 40 100% 70% 28 1225 AHTS 10000 bhp Available - Batamec Available 2010 1 32 1.24 40 100% 70% 28 1226 AHTS 6000 bhp Chartered Europe China Chartered 2009 2 16 1.24 20 100% 70% 14 627 AHTS 6000 bhp Chartered Europe China Chartered 2009 2 16 1.24 20 100% 70% 14 628 Mos cancelled AHTS Deep Sea 1 21000 bhp Available - Batamec Available Q111 - 75 1.24 93 100%29 MT 6009 - MFSV 3200 dwt Contract Europe Batamec Contract 2009 - 38 1.24 47 100% 60% 28 1930 MT 6009L - MFSV 3200 dwt Sold Australia Batamec Sold Q210 - 32 1.24 0 0% 60% 0 031 AHTS 8000 bhp Available - China Available Q410 - 22 1.24 27 100%32 Multi-support subsea vessel 292 ft Hired US - Project - - 55 1.24 13 19%33 Mosvold's cancelled AHTS 21000 bhp Newbuild - Batamec Newbuild Q111 - 73 1.24 91 100%34 Mosvold's cancelled AHTS 21000 bhp Newbuild - Batamec Newbuild Q312 - 72 1.24 89 100%
Total 783 876
Chartering fleet with strategic partners
No Type Contract Region Yard built Contract type Delivery AgeNAV
(USDm)Ex
rateNAV
(SGDm)Owner
ship funding on ves
Debt (SGDm)
NAV Otto
1 AHTS 5150 bhp Chartered Australia China Bareboat 2009 - 14 1.24 17 49% 70% 12 32 AHTS 5150 bhp Chartered Australia China Bareboat 2009 - 14 1.24 17 49% 70% 12 33 AHTS 5150 bhp Chartered Australia China Bareboat 2009 - 14 1.24 17 49% 70% 12 34 Work barge 300 pax Chartered Asia Pacific Batamec Time charter Q407 - 34 1.24 42 49% 30% 13 145 57.5m- AHTS 5150 bhp Contract Europe China Contract Q309 - 14 1.24 17 45% 70% 12 26 Work barge 300 pax Contract Europe China Contract 4Q09 - 35 1.24 43 49% 70% 30 67 AHTS 8000 bhp Newbuild - Batamec Sold Q211 - 22 1.24 27 0% 70% 19 08 AHTS 8000 bhp Newbuild - Batamec Sold Q411 - 22 1.24 27 0% 70% 19 09 AHTS 8000 bhp Newbuild - Batamec Newbuild Q112 - 22 1.24 27 49% 70% 19 4
NAV Calculation SGDm MethodNAV of own chartering fleet 876 Fair mkt valueNAV of fleet with strategic partnerships 46 Fair mkt valueNAV of yard 91 5x 2012 EV/EBITDA 6 to 5 0.08965 0.91Total assets 10132010 NIBD + future capex 826Value of WC end 2011 & 2012 80 Assumption: Long term WC need of SGDm 80NAV of all assets 267No of outstanding shares post equity issue 1890Equity value per share (SGD) 0.14Discount to NAV -15%Equity value per share after discount (SGD) 0.12
SapuraCrest Petroleum (Under Review) Play on Malaysia’s oil service market SapuraCrest’s involvement in the oil & gas industry spans offshore drilling, installing pipelines and facilities, marine services, offshore and near-shore marine engineering, the design, manufacture and operation of remote-operated vehicles, as well as maintenance activities for the oil & gas, marine and power utility industries. SapuraCrest is one of the largest integrated oil & gas services providers in Malaysia. Backed by an established track record, it is a preferred integrated service provider.
We like SapuraCrest for its leadership position in Malaysia’s oil service industry, particularly in IPF, offshore drilling and development, and offshore support services. We value soft factors – such as the strong working relationships forged with Malaysia's NOC Petronas (evident in project wins of MYR5bn from Petronas over the past three years) – highly in this relatively protected local Malaysia market. Based on our back-end calculation, the backlog is expected to be close to MYR6.2bn.
Divisions • Installation of pipelines & facilities (IPF) services. Transporting and
installing offshore pipelines and facilities through TL Offshore and Sarku Marine.
• Drilling services. 51:49 JV with Seadrill, managing and operating a fleet (5x) of self-erecting tender drilling rigs in production, drilling, workover & associated services.
• Marine services. Providing offshore support services such as geophysical surveys, construction support, topside maintenance in hook-up commissioning, platform repairs and maintenance services, ROV inspection & intervention, diving support, and accommodation services.
• Operations & maintenance. Providing onshore support services such as wellhead maintenance, and total management system for Petronas’s petrol stations and convenient stores in Malaysia.
Acergy), 1x DP2 heavylift pipelay construction vessel (with L&T), 1x multi-purpose accommodation work vessel, 4x accommodation work barges (1x is bareboat charter from Jaya), 1x newbuild derrick lay barge (with Quippo), 3x diving support vessels, 12x ROVs, 4x survey vessels.
Recent developments • In a recent industry update, sources said they believed Petrobras could be
awarding as many as six vessels in the pipelaying tender launched in July. SapuraCrest is believed to be the most aggressive bidder in both the 300t and larger 550t segments.
• Proposed merger between SapuraCrest and Kencana in July. • On 8 August SapuraCrest announced it had entered a sale & purchase
agreement with Clough to purchase its offshore marine construction division for cAUD127m (MYR400m) in cash. The deal is expected to be concluded over the next three months.
• To position itself for new target markets, SapuraCrest has put in orders for the construction of two heavylift pipelay construction vessels for USD227m at the Cosco Nantong Shipyard. Target delivery is 26–28 months from the effective contract date of 23 August.
Expected newsflow • Possible new IPF contracts from the upcoming tenders in Malaysia
(Petronas) and other Asian regions. • Q3 2011/12e results, which are due out in December. • New EPCIC contracts in international markets, such as Australia.
Valuation Our recommendation is Under Review (previously SELL), pending the conclusion of the merger between SapuraCrest and Kencana.
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Q2 2011/12 update (July end) In late September SapuraCrest reported its Q2 2011/12 results (July end). Below we include the text we wrote in our initial comments post the report.
For Q3 2011/12e (October end), we plan to issue a separate preview closer to the expected release, in December.
Key takeaways from Q2 earnings Q2 2011/12 earnings were in line with our expectations, as higher margins in the IPF segment made up for lower than expected revenues. Revenues were -26% versus our estimate, EBITDA was +4%, EBIT was -3%, and EPS was -0.3%. No quarterly consensus was available.
Regarding the proposed merger of SCRES and Kencana, the board resolved to accept the offer by IKSB in August 2011. We expect the merger to complete by Q1 2012 and the integration (which we believe has begun) to take longer. The SCRES share price dropped 13% after the offer was proposed in July and the offer is now at an 18% premium. Based on the offer terms and the current share price, the cash yield (cash offer component) is c18%, which we consider attractive. For the value of the IKSB shares (share swap for SCRES’ shares), we argue that the key swing factor in the combined entity (IKSB) is the NPV of synergies. We reiterate that integration is the key to success.
Our recommendation is Under Review (previously SELL), pending the conclusion of the merger of SapuraCrest and Kencana.
Absolute earnings in line with our expectations The Q2 figures (our estimate and % change YOY and QOQ in brackets) were: revenue of MYR699m (MYR949m, -22%, +27%), EBITDA of MYR144m (MYR139m, +12%, -4%), EBIT after associates of MYR148m (MYR152m, +23%, +8%), net income of MYR78m (MYR78m, +47%, +8%) and EPS of MYR0.061 (MYR0.061).
IPF margins continue to exceed our expectations Q2 revenues were MYR421m (we forecast MYR584m), EBITDA was MYR55m (we forecast MYR43m), and the margin was 13.0%, above our forecast of 7.4% but weaker than Q1’s 15.8%. We believe the key reason for higher margins was higher utilisation of its large vessels, as the JV vessels (Sapura 3000, LTS 3000) were deployed to execute the group’s IPF backlog during off-season periods in their respective JV contracts (Australia, India). Other reasons include: 1) less procurement in IPF contracts recognised; 2) lumpiness in cost allocation in projects – some projects completed in Q2 may have back-end loaded profit recognition; and 3) strong project execution, with the benefit of good weather.
We reiterate that the margin trend is expected to be volatile. Historically, some quarters have had good EBITDA margins (15.5% in Q4 2009/10, 13% in Q4 2010/11) but on a full-year blended basis they have been lower (6.9% in 2009/10 and 6.3% in 2010/11).
Drilling: lower utilisation but margins in line This is a 51/49% JV between SCRES and Seadrill. Q2 revenue was MYR169m (we forecast MYR207m), EBITDA was MYR67m (we forecast MYR84m), and the margin was 39.6% (we forecast 40.5%). We believe the lower than expected revenues were mainly due to downtime (non-drilling days due to maintenance or equipment downtime) associated with selected tender drilling rigs.
Marine Services: turnaround story increasingly convincing Marine Services is a relatively small proportion of the group (13% of Q2 EBITDA). Q2 revenue was MYR91m (we forecast MYR139m) and EBITDA was MYR19m (we forecast MYR9m). Higher than expected margins give us more confidence that a turnaround is in the offing, in line with our expectation of an operating improvement in 2011/12.
No contribution from Berantai development project yet There was no contribution from the Berantai oilfield development project, which commenced early this year. As highlighted previously, we believe this
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is mainly because Petronas and other contractors (such as SapuraCrest, Kencana and Petrofac) are still ironing out issues concerning the accounting method to be adopted for the recognition of revenues and costs as this is the first risk service contract awarded by Petronas.
Merger update The board resolved to accept the offer from IKSB in August 2011. We expect the merger to complete by Q1 2012 and the integration (which we believe has begun) process to take longer. The SCRES share price dropped 13% after the offer was proposed in July and the offer was at an 18% premium. Based on the offer terms and the current share price, the cash yield (cash offer component) is c18%, which we consider attractive.
For the value of the IKSB shares (share swap for SCRES’ shares), we argue that the key swing factor in the combined entity (IKSB) is the NPV of synergies, which can be broken down into earnings expansion through revenue growth (international markets such as Brazil, Australia and South East Asia) and an improving cost structure (shared services and efficiency in work process).
Integration is key to success. We reiterate that the integration will take time, as in all mergers, but we are not able to estimate the timeframe. Integration comes in the form of consolidating strategic plans, potential reaping of synergies gains in revenue growth through market/geographical expansion and cross-selling, streamlining shared services, and amalgamating the organisation culture of the two entities.
Please see separate report on the proposed merger issued in July.
Recent developments Well-positioned for Petrobras pipelaying tender In a recent industry update, sources said they believed Petrobras could be awarding as many as six vessels in the pipelaying tender launched in July. SapuraCrest is believed to be the most aggressive bidder in both the 300t and larger 550t segments. The other bidders that came in tops include Technip-Odebrecht JV and Subsea 7. Dayrates are of USD250k–300k. So far, sources suggest that Petrobras may take up three vessels from Sapura (1x 300t and 2x550t), two vessels from Technip-Odebrecht (2x550t), and one vessel from Subsea 7 (1x550t).
New pipelay vessel newbuilds To position itself for new target markets, SapuraCrest has put in orders for the construction of two heavylift pipelay construction vessels for USD227m at Cosco Nantong Shipyard. Target delivery is 26–28 months from the effective contract date of 23 August.
Acquisition of Clough’s offshore marine construction division On 8 August SapuraCrest announced it had entered a sale & purchase agreement with Clough to purchase its offshore marine construction division for cAUD127m (MYR400m) in cash. The deal is expected to be concluded over the next three months. We believe this deal offers SapuraCrest good exposure to the Australian market, in addition to its Sapura 3000 vessel (JV with Acergy) working at the Montara project off Australia.
The target entity has the potential and capacity to improve earnings, due to the low utilisation rate of its key vessels Jaya Constructor (utilisation: 35% in 2010, 60% in 2009) and Clough Challenge (laid up). However, we are neutral to the deal, due to the pending outcome of the transfer of the large single contract, the Clough Sea Trucks JV’s AUD300m Domagas contract off Gorgon with Chevron, and the integration of the combined entity that is expected to take time.
Key assets of target entity Key assets include the derrick lay barge Jaya Constructor, shallow water general purpose barge Clough Challenge, chartered-in subsea support vessel Normand Clough, one 15-pax saturation diving system, and two XL-150HP ROVs.
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• Jaya Constructor is a 1982-built (2009 upgraded) 8-point mooring system 120t pipelay tension derrick lay barge, which has been independently valued at USD70m.
• Clough Challenge is a 1996-built 55m support barge. It is recorded as ‘laid up’ in ABS records. A class renewal survey will be required before it returns to service.
• Normand Clough (utilised by JV Clough Helix) is not owned by Clough but is under a long-term charter from Solstad until 2013 with an option to extend for three one-year periods, including an option (exercisable from June 2013) to purchase the vessel.
Dependence on a single large contract – Domgas contract off Gorgon The financial performance of the target entity is highly dependent on the continuity of the AUD300m domestic gas (Domgas) scope of work contract with Chevron off Gorgon; Chevron has the right to terminate the contract, based on the terms. Hence, it is important that the client accepts the new entity to perform the services of this contract. The contract was awarded in December 2010 to Clough Sea Trucks JV (CSJV). CSJV is a JV between Clough and Sea Trucks Australia established to tender and execute a variety of offshore works on the Gorgon Project. The contract involves the provision of TNI of c90km of pipelines both onshore and offshore, from Barrow Island to the Dampier Bunbury natural gas pipeline, with Jaya Constructor and Clough Challenge. The contract is expected to complete in 2012.
Financial status of target entity The target entity posted a loss of AUD8m for July–December 2010 and had underlying earnings of AUD24m in the year ended 30 June 2010.
Implied multiples for the deal Based on the information that the one-off profit on sale of AUD8m is expected to be recognised by Clough, the implied P/B is c1.07x. The implied 2009/10 (June-end) P/E was 5.3x, but for 2010/11 (June-end) it is not meaningful as the marine construction division reported an underlying loss of AUD8m.
Valuation and recommendation Our recommendation is Under Review (previously SELL), pending the conclusion of the merger between SapuraCrest and Kencana.
SembCorp Marine (BUY, TP SGD4.70) Pure offshore yard play; market leader SembCorp Marine (SMM) is a leading global marine and offshore yard, specialising in a wide range of integrated solutions in drilling rig building, floating unit conversion, ship repair, and offshore engineering & construction. To differentiate itself, SMM offers a complete suite of turnkey services to the offshore oil & gas industry. Its specialised capabilities range from the engineering, procurement and construction of offshore production platforms and floating production systems, to the fabrication, integration, pre-commissioning, and offshore hook-up and commissioning of topside process modules and production modules for fixed platforms and mega FPSOs.
SMM is developing a modern, cost-efficient and integrated yard facility at Tuas, Singapore, on a 206ha reclaimed site, to be developed in three phases over 16 years. Investment is estimated at cSGD750m, on a 30+30-year lease. Focus of the 73.3ha yard will be on ship repair and conversion; the expected operating date is late 2013.
Divisions • Rig building and conversion. A world-leading builder of jack-ups,
semi-submersible drilling rigs, and other assets for the oil & gas industry. Key clients are rig owners and operators for oil companies.
• Ship repair. Ship-repair services for commercial shipping and offshore vessels; recognised as an industry leader.
• Investments in Cosco Shipyard and Cosco Singapore.
Assets • Offshore yards. Main presence in Singapore with Jurong (semi, jack-up),
PPL (jack-up) and Sembawang (conversions/FPSO). • Tuas yard development. • c30% stake in China shipyard Cosco, and 5% stake in Singapore-listed
Cosco Singapore.
Recent developments • Existing order book of cSGD5.8bn (average expected book to bill 1.23x)
is expected to provide revenues and earnings visibility for the next 15 months.
• YTD it has secured close to SGD2.8bn of new orders, with the most recent order of SGD130m for an FPSO conversion in October.
• Share price down 41% since August. • Petrobras’s newbuild rig tender for the remaining 21 rigs opened in
October. SMM is in the running for six rigs (indicative pricing USD800m each). We believe SMM stands a good chance of winning some orders, but we are unable to quantify the valuation impact at this time due to the limited information available on pricing and terms. As stated before, potential orders from this tender have not been factored into our model.
Expected newsflow • Exercised new jack-up orders from the outstanding eight options. • New orders internationally from rig owners and oil companies. • Petrobras tender awards in late 2011e. • Q3 results due out on 3 November.
Valuation Our base-case DCF is SGD4.66 per share. We believe the key valuation drivers remain long-term order wins of SGD4.6bn and an EBITDA margin of 14%. We reiterate our BUY recommendation with a DCF-based target price of SGD4.70.
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Q3 preview The Q3 results due out on the 3 November.
We do not disagree with the widely held view that newbuild activity will slow down; however, we argue that the market is too defensive and is pricing in a weaker than normalised cycle. As one of the world’s top offshore yards, we believe a normalised cycle would result in sufficient demand to fill its slots. The share price is down 41% since early August, which to us only makes it more attractive in terms of risk/reward. Based on the current share price, the market is pricing in SGD3.3bn of new orders each year and 12% long-term margins as per our DCF model, which we believe is not demanding.
The jack-up and deepwater floater segments remain supported by robust activity. We believe that this, as well as the tightening of the ultra-deepwater (UDW) space, could result in new ordering activity in the medium to longer term. This would be a positive trigger for both Keppel and SMM, as they have seen limited deepwater new orders this cycle, with most drillship orders going to the Koreans. We now see a greater chance that deepwater semi-sub drilling rig orders will return and believe the Singapore rig builders will be well-positioned for them.
Our base-case scenario assumes that the O&M ordering cycle normalises, with sufficient demand to fill slots at top-end yards. SMM and KEP are the top rig builders in this market and we believe are in a good position to maintain market share in jack-ups and semis.
SMM’s order book of SGD5.8bn (average expected book to bill 1.23x) should provide revenues and earnings visibility for the next 15 months. It has a good track record in project execution, with strong operating margins over the past few years: the EBITDA margin has grown from 7.7% in 2006 to 22.7% in 2010. We believe it will be able to achieve a ‘new normal’ margin of 14% in the long run, due to continued improvements in its processes.
YTD SMM has secured close to SGD2.8bn of new orders, versus its closest competitor Keppel’s SGD8.3bn. We keep our 2011e new order estimate of SGD5.4bn despite SMM’s ordering pace being slower than expected. We expect our new order estimate to be met by: 1) four out of eight outstanding newbuild jack-up options, worth cSGD805m, expected to turn firm by year-end; 2) new semi-sub orders for the US Gulf and North Sea markets; and 3) production units (platforms) for developments in Asia, Brazil, Australia, and North Sea. New order flow is lumpy in nature, and we see a downside risk to our new order estimate.
We expect a 2011e annualised dividend yield of 4% (so far SMM has declared a dividend of SGD0.05 per share, post the Q2 results).
Downside risks Risks include further market weakness, which would put downward pressure on the shares, as SMM is widely regarded as a beta stock and is well-held by institutional investors.
Another potential downside risk relates to order backlog quality. Rig orders (cSGD3.6bn) since October 2010 have been mainly on a bullet payment structure (20% initial downpayment, 80% upon delivery), and 80% of orders have yet to be financed. Hence, in a downcycle scenario where speculative rig owners might default/cancel due to a lack of access to funding and chartering contracts, yards could end up with newbuilds (as in the previous downcycle, when SMM took up PetroMena rigs). However, based on our assessment of SMM’s order book quality, we believe there is a limited risk of cancellations, as the rig owners are established industry leaders.
In the event of cancellations, we argue that both yards would be able to maintain a buffer (cost of building a rig is below market value) to protect their downside, given their execution capabilities. Furthermore, we argue that both companies’ balance sheets would allow them to hold on to any potential cancelled rigs, awaiting better pricing when the market returns.
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Q3 earnings not expected to be a catalyst Given the current weak macro uncertainty, we believe the Q3 earnings report (due out on 3 November) will not garner a great deal of investor focus.
We forecast Q3 revenues of SGD1,445m, EBITDA of SGD249m, EBIT of SGD229m, net income of SGD202m, and EPS of SGD0.097. No quarterly consensus is available, but on a full-year EPS basis we are 3% below for 2011e, 4% below for 2012e, and 9% below for 2013e. We expect margins to come down to sustainable levels, with our Q3 EBITDA margin forecast of 17%, a decline from H1’s 22% and 2010’s 23%.
We expect Q3 earnings to be supported by the expected earnings recognition of the Songa Eclipse semi newbuild rig. She was delivered in Q3, and we expect c30% of the outstanding project revenues (i.e. cSGD280m) and EBITDA of cSGD56m to be recognised in the quarter.
Margin trend
0%
3%
6%
9%
12%
15%
18%
21%
24%
27%
30%
33%
36%
Q1/0
6
Q2/0
6
Q3/0
6
Q4/0
6
Q1/0
7
Q2/0
7
Q3/0
7
Q4/0
7
Q1/0
8
Q2/0
8
Q3/0
8
Q4/0
8
Q1/0
9
Q2/0
9
Q3/0
9
Q4/0
9
Q1/1
0
Q2/1
0
Q3/1
0
Q4/1
0
Q1/1
1
Q2/1
1
Q3/1
1E
Q4/1
1E
2011E
2012E
2013E
EBITDA margins Historical averages Source: Company, DnB NOR Markets
EBIT marginsRig building 13% 20% 28% 36% 23% 19% 19% 18% 17% 18% 14% 14%Shipbuilding - - - - - - - - - - - -Conversions 12% 16% 25% 26% 18% 24% 21% 12% 11% 18% 12% 13%Shiprepair 10% 13% 15% 15% 13% 11% 16% 10% 10% 12% 10% 11%Others 8% 8% 8% 6% 7% 10% 10% 10% 10% 7% 8% 8% Source: DnB NOR Markets Note: No quarterly earnings breakdown, they are based on our estimates from group margins earned
Balance sheet strength SMM has net cash of SGD1,589m (end-Q2) and the upcoming capex for its new Tuas yard has already been funded. We believe SMM’s balance sheet strength would allow the company to take advantage of the current market situation (weaker asset pricing) in opportunities that could reward it in the long run.
High-quality order book During a bear market, market participants are particularly concerned about order book quality. SMM’s order book comprises orders from blue chip rig owners such as Transocean, Seadrill, Atwood Oceanics and Noble Drilling. Examining and monitoring the quality of the order book is particularly necessary in choppy markets with depressed markets heightening the possibility of payment delays or even order cancellations in a worst-case scenario. In SMM’s case, due to the high-quality names in the order book, we believe it is unlikely to face any cancellations, barring similar shocks to those seen in 2008.
share Calculation of WAACPV of free cashflow 2011-2035 (SGDm) 5,095 2.45 Market value equity (2011) in SGDm 8011PV of free cashflow 2035+ (SGDm) 736 0.35 - in % 157%Total PV of free cashflow (SGDm) 5,831 2.81 Net interest bearing debt (2010) in SGDm -2,907Other financial investments as of Q22011 (SGDm) 91 0.04 - in % -57%Net debt 2010 (SGDm) -2,907 -1.40Net value free cashflow (SGDm) 8,830 4.25 Risk premium 5%Market value of associate Cosco Singapore (SGDm) 109 0.05 Beta 1Implied value of Cosco Shipyard (peers' PE multiple 2011) 728 0.35Total value (SGDm) 9667Total value per share (SGD) 4.66 Risk free rate 3%
Risk premium 5%Terminal Growth Assumptions Interest rate 5%Nominal growth year 2035+ 2.5% Tax-rate 17%Factor 12.8 Net WACC 11% Source: DnB NOR Markets
Trough scenario In a trough scenario, the share price could fall to SGD2 based on a 6.1x trough P/E (in Q4 2008) on 2012e EPS. This implies long-term new order wins of SGD1.2bn (normalised order intake of SGD4bn 2006–2010) and an EBITDA margin of 9% (normalised EBITDA margin 13.7% 2006–2010). While we cannot rule out potential downside of 48% in such a scenario, we do not consider it likely.
Market outlook – new orders Newbuild activity remains healthy, but slower than expected Although newbuild activity is expected to slow, it should remain high in the jack-up and deepwater floaters segments. Our view is that newbuild activity will remain high, but that the pace will be slower than in recent quarters due to macro factors (such as potentially tighter financing).
We believe that robust activity and tightening of the ultra-deepwater (UDW) space could result in new ordering activity in the medium to longer term. This would be a positive trigger for both Keppel and SMM, as they have seen limited deepwater new orders this cycle, with most drillship orders going to the Koreans. We now see a greater chance that deepwater semi-sub drilling rig orders will return and believe that the Singapore rig builders will be well-positioned for them.
Premium jack-up remains tight Premium jack-up utilisation of 96% is very tight, compared to 78% in August 2009. Contract coverage in 2013e is expected to be 38%, which is relatively decent given the new jack-ups coming into the market and the shorter contract length of jack-ups (shorter time to drill shallow-water wells).
UDW ordering activity Dissecting the newbuild cycle since October 2010, we see that the 41 UDW floaters ordered recently include 7x drillships by Petrobras, 5x semis (2x cat-D Statoil, 2x Sevan). Excluding these, there are 29 drillships being placed. We expect most of these drillships (at least 21) to go to Brazil due to its delayed newbuild programme. Hence, the UDW market is far from overcrowded. In fact, with the ultra-deepwater market characterised by superior visibility and higher dayrates, we expect newbuild ordering activity in the UDW to come back.
Return of deepwater rig orders is the price trigger The key takeaway from our recent trip to Houston to meet 15 oil service companies was that they remained highly optimistic that dayrates would continue to move higher. Optimism is particularly high in the ultra-deepwater segment.
Also, activity in the US GoM is set to move higher. In the aftermath of the Macondo incident in the US GoM last April, we have seen increased demand for premium equipment, from both oil and rig companies. There has been a significant increase in enquires and early-stage tenders for ultra-deepwater capacity in recent weeks for the US GoM. We expect several awards ahead.
Following recent updates with various industry participants, it is evident that there continues to be an increase in the number of ultra-deepwater requirements coming to the market. Just over the past few weeks, we have seen incremental demand in West Africa, East Africa and South East Asia, in addition to the positive trend in the US GoM.
This supports our view that 2012 ultra-deepwater will soon be very tight and we are likely to see several contract announcements in the coming months. It is also positive that, in enquires, durations are starting to get longer.
Economics attractive at current newbuild price At current dayrates, the economics also look good for newbuilds, in particular ultra-deepwater units, with rates in the mid- to high-USD400k, i.e. above the level needed for a reasonable return on a newbuild today. We estimate that a dayrate in the low USD400k gives a 10% return on total capital, which translates into a 22% return on equity assuming 70% leverage and a cost of debt at 5%. Hence, we view the risk/reward on new rig orders at the current rate as attractive given the potential return.
Potential demand for high-spec jack-ups with new Aldous find Statoil recently announced a mega find, the Aldous Major South discovery in the North Sea, which is estimated to hold 400m–800m barrels of oil equivalent and could be the world’s largest offshore oil find this year. We believe it could add to demand for harsh-environment jack-ups, such as the
Activity in US GoM returning – strong market support for UDW activity, especially for semi drilling
UDW market getting very tight, new orders made in this cycle are far from overcrowding the market
Potential return of UDW rig orders a strong trigger for Singapore yards
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Gusto MSC CJ70 and Friede and Goldman JU3000N models that have been popular among operators in the North Sea (e.g. Noble Drilling, Seadrill).
Mid-water semis also high Rig owners commented in recent results briefings that they were seeing an increasingly tight market for mid-water floaters, particularly in the North Sea. Tendering activity here has also picked up of late, with the bulk of new tenders focused in regions such as the North Sea, India and South East Asia. Together, we believe higher activity, tight supply, and new finds (Aldous Major and Avaldsnes discoveries in NCS) could provide the catalysts for an order revival for mid-water harsh-environment semis for Singaporean yards.
Petrobras tender update The Petrobras newbuild rig tender for the remaining 21 rigs has opened in Brazil, in line with expectations that it would close in September. The structure is largely unchanged from previous updates that Petrobras would charter the rigs from Sete and its JV partners or with drilling contractors, which would build the rigs with partnered yards.
SMM is in the running for six rigs (indicative pricing USD650-750m each) and we believe it is likely to tender for the drillship design.
From the opened bids, though their rates are marginally higher, we believe SMM still stands a good chance of winning some orders. Its combination with Seadrill is strong, as their participation is important to the Brazilian offshore industry, due to their expertise. And we reiterate the bids are not solely judged by the rate and mobilisation level. There are Net present value considerations in addition to adjustments for technical specification.
We are unable to quantify the valuation impact at this time due to the limited information on rig pricing and terms. As stated before, potential orders from this tender has not been factored into our model. We reiterate that building UDW newbuilds in Brazil to meet local content requirements is challenging for yards, due to the lack of existing infrastructure and skilled labour. We would be positive if these contracts were not entirely turnkey-based and have cost escalation clauses that offer some downside protection to the yard. See our note dated 4 October for more details.
Bids of 21 rigs tender and our expectations about yard and equipment Drill-ships in JVs with SETE (1.5 derrick)Bidder Day-rate (USD) Mobilization (USD) Likely yard Likely design Likely topside Likely riser Likley BOPEtesco 604,857 31,551,132 Engevix* Gusto P12000 NOV NOV NOVEtesco 604,737 32,118,979 Engevix* Gusto P12000 NOV NOV NOVEtesco 611,797 28,075,235 Odebrecht yard * LMG Marin Aker Aker or Cameron CameronEtesco 609,537 29,288,232 Odebrecht yard * LMG Marin Aker Aker or Cameron CameronEtesco 605,467 28,822,282 Engevix* Gusto P12000 NOV NOV NOVOdebrecht 619,717 28,408,239 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdebrecht 618,597 29,370,610 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdebrecht 621,747 29,922,686 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdebrecht 620,737 30,648,032 Odebrecht yard LMG Marin Aker Aker or Cameron CameronOdjfell-Galvao 625,277 28,510,902 Jurong LMG Marin NOV or Aker NOV, Cameron or Aker NOV or CameronOdjfell-Galvao 627,387 29,604,509 Jurong LMG Marin NOV or Aker NOV, Cameron or Aker NOV or CameronOdjfell-Galvao 630,467 30,627,974 Jurong LMG Marin NOV or Aker NOV, Cameron or Aker NOV or CameronSeadrill 628,397 29,003,515 Jurong LMG Marin NOV NOV NOVSeadrill 629,507 30,070,952 Jurong LMG Marin NOV NOV NOVSeadrill 630,587 31,054,485 Jurong LMG Marin NOV NOV NOV* Etesco has bid 3 units at Engevix and 2 at Odebrecht, uncertain which rig is at what yard
Semis in JV with SETEOdebrecht 618,057 32,381,368 Keppel FELS DSS 38E NOV NOV NOVPetroserv 620,817 29,803,804 Keppel FELS DSS 38E NOV NOV NOVPetroserv 626,397 31,094,654 Keppel FELS DSS 38E NOV NOV NOVQueiroz 616,387 30,530,586 Keppel FELS DSS 38E NOV NOV NOVQueiroz 623,937 31,679,166 Keppel FELS DSS 38E NOV NOV NOVQueiroz 612,607 29,129,291 Keppel FELS DSS 38E NOV NOV NOV
Drill-ships (dual activity)Ocean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOVOcean Rig 619,667 35,000,000 EISA (or OSX) Huisman NOV NOV Source: Petrobras, DnB NOR Markets
Cycle is not over yet, in our view We have not been expecting a super-cycle in orders for the yards, but rather given the fall in yards’ share prices we see a divergence between what the market is discounting and the current cycle. We argue that the oil & gas cycle
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is longer-term and that oil companies look beyond short-term volatility, as pointed out in our market outlook.
YTD SMM has secured close to SGD2.8bn of new orders, versus its closest competitor Keppel’s SGD8.6bn. We keep our new order estimate for 2011e of SGD5.4bn despite SMM’s ordering pace being slower than expected. We expect our new order estimate to be met by: 1) four out of eight outstanding newbuild jack-up options, worth cSGD805m, expected to turn firm by year-end; 2) new semi-sub orders for the US Gulf and North Sea markets; 3) production units (platforms) for developments in Asia, Australia, and North Sea. New order flow is lumpy and we see a downside risk to our new order estimate.
We expect H2 2011 rig ordering momentum to slow, but we argue that the order rate should still be decent with upcoming tenders. The share price is discounting much lower order intake, in our view.
Our base-case scenario assumes the O&M cycle normalises, with sufficient demand to fill the slots at top-end yards. SMM and KEP are the top rig builders in this market, in our opinion, and we believe they are in a good position to maintain market share in the rig building segment of jack-ups and semis.
Upcoming potential new order tenders Bid status Project Client Contenders
Bids submittedBrazil flexible pipelaying vessels (up to 6, packages for 1 or 2 vessels) Petrobras
Fabrication and installation of Wellhead platform for Bukit Tua Petronas
SMOE, Nippon Steel Enginnering, J Ray McDermott, Saimpem, Puni Lloyd, Guna Nusa, Bakrie Construction, Pal and Raga Perkasa
Potential interest, tendering not out yet 5 jackups Saudi Armaco Open (SMM likely to participate)
Potential interest, tendering not out yet 2 jackups CSMC Open (SMM likely to participate)Potential interest, tendering not out yet 1 jackup (CJ70) Rowan Open (SMM likely to participate)
Potential interest, tendering not out yet
1 jackup (Friede & Goldman Super M2 or LeTourneau Super 116E design preferred) Dragon Oil Open (SMM likely to participate)
Potential interest, tendering not out yet 2 semis European Open (SMM likely to participate)Qualified biddders invited - operators and yards Semi production unit Inpex Open (SMM is likely to partner operators)Potential interest, tendering not out yet 1 540-550ft CJ80 jack-up (large unit) Maersk Open (SMM likely to participate)Potential interest, tendering not out yet Cat J drilling semis Statoil Open (SMM is likely to participate) Source: Upstream, DnB NOR Markets
New orders: estimates and orders secured historically In SGDm (Sembcorp Marine) 2006 2007 2008 2009 2010 2011 ytd 2011E 2012E 2013ENew orders (announced) 4,090 5,711 5,700 1121 3500 2845 na na naJackup new orders 509 1,782 1,969 0 2,179 1,879 2,700 2,100 2,100Semi/ drillship new orders 1,480 2,430 3,210 707 0 0 1,500 1,500 1,500Conversions new orders 2,101 1,499 521 414 1,321 966 1,200 1,200 1,200Total newbuild orders (excluding repairs) 4,090 5,711 5,700 1121 3500 2845 5,400 4,800 4,800
Source: DnB NOR Markets
Outstanding rig options at SMM and our base-case for them to be exercised this year
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Outstanding options
Date Client Rig type No of unitsEst value per unit (USDm)
Total value (USDm)
Total value (SGDm) Remarks
5-Oct-2010 Atwood Oceanics Pacific Class 400 jackup 2 200 400 504 One option had been exercised, leaving two outstanding options. We expect another option to be exercised
18-Oct-2010 Seadrill F&G 2000E 4 155 620 781 We expect 3 options to be exercised this year1-Aug-2011 Noble Drilling Friedman & Goldman
JU3000N (Upgrade from JU2000E)
2 220 440 554 New options secured in August, we expect them to turn firm in 2012
Total 8 1460 1840Our base case for 2011e 4 665 805 No of options we expect to turn firm this year Source: Company, DnB NOR Markets
Replacement ratio of new order intake to revenues (SGDm)
2006 2007 2008 2009 2010 2011E 2012E 2013ERevenues (offshore rigs) 1742 2499 2840 3635 3048 2496 3665 3876Revenues (conversions) 900 1131 1354 1343 820 1179.5 930.5 805Jackup and Semi new order intake 1,989 4,212 5,179 707 2,179 4,200 3,600 3,600Conversions new order intake 2,101 1,499 521 414 1,321 1,200 1,200 1,200Ratio of order intake to revenues booked (rigs) - replacement ratio 1.1 1.7 1.8 0.2 0.7 1.7 1.0 0.9Ratio of order intake to revenues booked (conversions) - replacement ratio 2.3 1.3 0.4 0.3 1.6 1.0 1.3 1.5
Historical 5-year revenue replacement ratio (rigs) 1.1Historical 5-year revenue replacement ratio (conversions) 1.23-year forward replacement ratio (rigs) based on our estimates 1.23-year forward replacement ratio (conversions) based on our estimates 1.3 Source: Company, DnB NOR Markets
STX OSV (BUY, TP SGD1.90) Differentiating itself through relentless focus on quality STX OSV is a major global designer and shipbuilder of high-end offshore support vessels (OSV). Its competitive advantage lies in its ability to innovate and integrate cutting-edge technology into highly customised vessels for clients.
It operates nine shipyards across four countries: Brazil (one), Norway (five), Romania (two) and Vietnam (one). Brazil is STX OSV’s key growth market as the hunt for oil heads toward deeper waters. To this intent, a second Brazilian yard is under way and should contribute to expanding the firm’s capacity in the region. STX OSV has established itself as one of the earliest foreign yards in Brazil, having operated there since 2001.
STX OSV’s core shipbuilding business centres around the high-spec OSV segment, such as primary tonnage seismic vessels, and support tonnage vessels including large-scale anchor handling tug supply vessels (AHTS >20,000BHP), platform supply vessels (PSV >4,500DWT) and offshore subsea construction vessels (OSCV).
OSV shipbuilding is core business (% of 2011e revenues) • AHTS (39%). Anchor handling tug supply vessels are used primarily to
tow rigs, anchor, and for general offshore supply duties, e.g. cargo/equipment.
• PSV (34%). Platform supply vessels are designed to transport supplies, liquid and cargo to offshore installations. Usually seen as the workhorse of the offshore industry.
• OSCV (16%). Offshore subsea construction vessels are deployed to perform construction work for offshore installations, such as platforms, topsides, hook-up commissioning and decommissioning.
• Other vessels (7%). Icebreakers, LNG-powered ferries, coastguard vessels, and seismic vessels.
• Trading and variation orders (4%). Trading involves activities from the sale of designs and equipment packages to third-party yards, while variation orders are increment requests to alter the original order, sometimes when vessel construction is already under way.
Recent developments • IPO on 12 November 2010, raising USD100.5m. The proceeds were
utilised mainly for the construction of the second yard in Brazil, the expansion of existing yard capabilities in Norway, and the upgrading of yard facilities in Vietnam and Romania.
• Environmental licence of the new Brazilian yard at Suape was granted in April 2011. Next up will be the firm awards of the eight LPG carriers, estimated worth NOK3,000m (USD536m), for the new Brazilian yard.
• New orders secured, worth NOK5.7bn YTD (included the second vessel, cNOK350m, for Island Offshore, which has yet to turn firm and is subjected certain conditions), with the latest orders being the three advanced stern trawlers for Aker Seafoods (total NOK750m) and one 3.800dwt PSV for Troms.
Expected newsflow • Potential new orders from the OSV and non-OSV segments. • The Q3 results are due out in November.
Valuation We reiterate our BUY recommendation and DCF-backed target price of SGD1.90.
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Q3 preview The Q3 results are due out in November.
Good margins expected We expect Q3 revenues of NOK2,991m, EBITDA of NOK455m, EBIT of NOK419m, net income of NOK307m, and EPS of NOK0.26. Margins remain the key swing factor as the yard is running at optimal capacity. We continue to expect good margins for Q3, with an EBITDA margin of 15%. The margin has outperformed both our and the market’s expectations for the past four quarters (average 15% EBITDA).
There are no quarterly consensus numbers available, but our 2011e EPS is in line with consensus.
Majority of order book internally designed, supporting margins The mix of internal versus external designs in the orders secured YTD is still healthy, with most new orders (eight of 12, 67%) based on internal designs; in comparison, 21 of the 29 vessels last year (72%) were based on internal designs. We believe that a high proportion of internally designed vessels lends support to stronger margins going forward.
Ordering activity We reiterate that ordering momentum may slow in today’s environment but we do not expect this to result in a dry spell for STX OSV. STX OSV has been able to grab market share over the last cycle and current cycle for large vessels. We continue to consider STX OSV as the best proxy yard (high-end) in an investment cycle that we believe is not over and is gathering momentum, as pointed out in our sector analysis earlier.
The investment cycle of OSV typically lags behind that of rigs and offshore tenders (subsea, offshore construction, production, development) by 6–12 months. We expect higher demand for OSV (especially the deepwater and more sophisticated vessels), driven by a large number of newbuild rigs (jack-ups and floaters) being ordered in the past few months and good activity in the tenders for offshore projects.
And based on recent interactions with management, we understand that the activity level in the design and sales remains very high, though the macro bearish factors are affecting the timeline to finalise some of the leads it is working on near-term.
We remain comfortable with our new order estimates We expect STX OSV to secure NOK13.2bn of orders in 2011e, of which cNOK5.7bn (included the second vessel, cNOK350m, for Island Offshore, which has yet to turn firm and is subjected certain conditions) has been secured YTD. We expect our new order estimate to be met by:
• Potential two pipelaying newbuilds worth USD300m (NOK1.7bn) each, if Technip (one of the front-runners) secures the Petrobras newbuild tenders, as Technip enjoys good relationship with STX OSV.
• The delayed eight LPG carriers, worth cNOK3bn for Transpetro, expected to be made effective.
• Potential OSV orders for 3–5 units, which we believe this is likely in current environment.
• Other vessel types such as high-end fishing vessels and renewable energy vessels.
Historical new orders secured
In NOKm Units 2007 Units 2008 Units 2009 Units 2010 Units2011 ytd
Total new orders (announced) 28 15,461 4 5,692 8 4458 27 12,561 16 5,696 Source: DnB NOR Markets, company Note: New orders secured YTD include the second vessel (cNOK350m) for Island Offshore, which has yet to turn firm and is subjected certain conditions
New order estimates
In NOKm Units 2011E Units 2012E Units 2013EAHTS 7 3,500 8 4,800 9 5,400
Other vessels 10 4,000 4 2,000 5 2,500Trading na 0 na 200 na 200
Variation orders na na na na na naTotal new orders (expected) 28 13,200 25 14,300 28 15,900
Source: DnB NOR Markets estimates, company Note: Our 2011 new order estimate Includes the eight LPG carriers that we expect to be effective in H2 2011; initial expectation was in Q1–Q2 2011
Strong balance sheet allows flexibility With net cash (Q2 NOK2.2bn or USD400m) and outstanding projects financed mainly by external project financing, we argue that STX OSV has
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the flexibility to explore various options and opportunities (buying assets in low-pricing environment, higher one-off dividends, initiating share buybacks).
Order book visibility We believe that STX OSV’s order book of cNOK16.7bn offers good revenue and earnings visibility of up to 17 months and should allow it to cope with current market weakness.
Historical and forecast order book balance
At the end of each calendar year
2,852
0
0
00
14,272 21,148
8,5386,248
27,224
22,348
16,41017,031
10,150
0
5,000
10,000
15,000
20,000
25,000
30,000
2007 2008 2009 2010 2011E 2012E 2013E
NO
Km
Order book (existing orders) Orderbook (new orders)
At the end of each calendar year
12,947 12,896
7,601
4,286 3,1695,002
6,431
6,1023,596
4,808
7,7887,314
6,964
8,162
7061
4732
27391288
1580
2301
3234
881
356
6692901 6189
6120
5950
593 768
435
381
224
233
768
0
5,000
10,000
15,000
20,000
25,000
30,000
2007 2008 2009 2010 2011E 2012E 2013EN
OK
m
AHTS PSV OSCV Other vessels Trading + variation orders Source: DnB NOR Markets, company
Zero-cancellation track record minimises risk In a bear market, investors are generally wary of an order book’s quality (risk of cancellation). With STX OSV’s zero-cancellation track record and order book made up of blue-chip clients (established players), we argue that the risk of cancellation remains low.
Sustainable dividend policy STX OSV is trading at 5% our remaining 2011e dividend forecast, of which SGD0.05 interim was paid in September. The annualised dividend yield is 10%, based on a 50% pay-out ratio. For 2012e–2013e, we expect an average dividend yield of 5% on a minimum 30% pay-out ratio. We do not see a high risk that it will cut the dividend, but rather we believe it might declare a one-off dividend. We now estimate a cash balance of SGD0.34/ share after adjusting for remaining capex (mainly for the new Brazilian yard).
Recently launched BNDES P&G programme supportive State-owned development bank BNDES has approved the creation of a support programme for the development of the supply chain for oil & gas sector related goods and services, called BNDES P&G. This programme has a budget of BRL4bn and is effective until the end of December 2015. It offers financing for working capital, support for R&D, and capital investment for the expansion of production capacity at preferred rates (ranging from 4.5% per annum for innovation to 11.04% for financing working capital). The financing rates are attractive relative to current benchmark rates of 12.5% per annum. We view this as a positive development that will support vessel owners considering fleet expansion in Brazil, and yards such as STX OSV wanting to expand operations and acquire more capital equipment as the programme provides access to capital at preferential rates.
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Valuation and recommendation Clear mispricing We argue that STX OSV’s recent share weakness is overdone. It was initially one of the best-performing stocks during this sell-down, with positive gains of 25% going into September. However, persistent weakness on the macro front eventually dragged the stock down, by 27% (was down 46% before the rally seen over these two weeks) in September/October. We believe the correction was generally driven by funds rebalancing (reducing positions to cash) and negative selling momentum, rather than by fundamentals.
STX OSV is undervalued by most investment metrics, in our view. We see a significant divergence between fundamentals and the current share price, as the company offers investors a high ROE, a strong balance sheet (net cash, low capex), a strong FCF-generating business (high barriers to entry as a high-end OSV yard), a long-term annualised dividend yield of 5% (minimum pay-out ratio 30%), a good quality order book of NOK16.7bn (including the second vessel, cNOK375m, for Island Offshore, which is subjected to certain conditions to be met) offering 17 months’ visibility, and relatively good trading liquidity (SGD12m shares traded daily).
STX OSV is trading at undemanding multiples of a 2011e P/E of 5x and 2012e P/E of 6x, and a 2011e EV/EBITDA of 2.4x and 2012e EV/EBITDA of 2.7x, with an ROE of 30%+ over the next three years. It is clear to us that at the current level, STX OSV offers a high margin of safety longer-term. We continue to consider it the best proxy yard (high-end) in an investment cycle that we believe is not over and is gathering momentum.
With net cash (Q2 NOK2.2bn, USD400m) and outstanding projects financed mainly by external project financing, we argue that STX OSV has the flexibility to explore various options and opportunities (buying assets in low-pricing environment, higher one-off dividends, initiating share buybacks).
We value STX OSV using a DCF. We reiterate our BUY recommendation and target price of SGD1.90.
DCF valuation SGD1.86
Discounted value of free cashflowPer
share Calculation of WACCPV of free cashflow 2011-2035 (NOKm) 6,576 5.57 NOK Market value equity (2011) in NOKm 5829PV of free cashflow 2035+ (NOKm) 635 0.54 NOK - in % 177%Total PV of free cashflow (NOKm) 7,211 6.11 NOK Net interest bearing debt (2010) in NOKm -2,541Other financial investments as of Q111 (NOKm) 29 0.02 NOK - in % -77%Net debt 2010 (NOKm) -2,541 -2.15 NOKNet value free cashflow (NOKm) 9,781 8.29 NOK Risk premium 5%
Beta 1.0
Total value (SGDm) @ SGDNOK 4.5 2198Total value per share (SGD) 1.86 Risk free rate 3%
Risk premium 5%Terminal Growth Assumptions Interest rate 5%Nominal growth year 2035+ 2.5% Tax-rate 28%Factor 12.4 Net WACC 11% Source: DnB NOR Markets
Swiber Holdings (BUY, TP SGD1) Well-positioned for upbeat EPCIC market Swiber Holdings is an offshore oil service company, focused on providing engineering, procurement, construction, installation and commissioning (EPCIC), and offshore supply services to the oil & gas industry. It offers integrated solutions in three core business units: Offshore Construction Services (EPCIC), Offshore Support Services (OSS), and Offshore Development Services (ODS). It is a niche player in the interesting shallow water market, where we expect a healthy flow of subsea projects in shallow Brazil, India, Vietnam and Thailand. We believe it is well-positioned for contracts in these countries through its JVs with established local partners and direct contacts with the major oil companies. For instance, it is partnering Alam Maritime in Malaysia, CUEL in Thailand, and Rawabi in Saudi Arabia. It has a solid order book of cUSD680m.
Divisions • Offshore EPCIC services. Core business providing full suite of offshore
construction services encompassing engineering, procurement, construction, installation and commissioning (EPCIC) services.
• Offshore support services. Offshore marine fleet and diving support unit, mainly to support Swiber’s offshore EPCIC activities, presenting enhanced efficiency, timely project delivery and competitive pricing.
• Shipyard. Support role for own fleet servicing and upgrading, yard facilities with a comprehensive and growing capability for ship repair, conversion and construction, subsea support services and a widening range of engineering design, fabrication and offshore engineering services.
Assets • Fleet of 50x offshore vessels: 12x offshore construction and pipelaying
vessels, with the remainder in offshore support functions (see fleet list).
Recent developments • Contracts worth USD758m secured YTD. Swiber won USD224m of new
EPC and TNI contracts in the last two weeks of September. • Proposed perpetual preference shares. Swiber passed a resolution at the
EGM on 3 October 2011 for the proposed issuance of cumulative non-voting perpetual preference shares. The plan being considered is likely to have a convertibility option into ordinary shares under limited circumstances, which will not result in a dilution of more than 40% for existing shareholders. No other details (size, cost, convert terms) have been provided.
Expected newsflow • Possible new EPCIC contracts in South East Asia (Malaysia, Vietnam,
Indonesia, Thailand, Myanmar, Malaysia, Brunei), Taiwan, and India. • Q3 results, which are due out in November.
Valuation Our NAV (including Kreuz’s market value) is SGD1.02 per share. With an enlarged construction pipe-laying and support fleet, we continue to regard Swiber as well placed in its niche position for the upcoming tendering activity in the shallow water pipe-laying markets in Asia. We reiterate our BUY recommendation and SGD1 price target.
Sector report > Asian Offshore Supply
DnB NOR Markets - 121
17.10.2011
Q3 preview We expect Swiber to report its Q3 results in mid-November.
Focus on execution of existing backlog; Q3 tends to be good We expect Q3 revenues of USD183m, EBITDA of USD24m, EBIT of USD19m, net income of USD14m, and EPS of USD0.02.
Focus in the report will be on margins again, i.e. the execution of the existing backlog of USD1bn. Margins are generally volatile for subsea players (execution risks, engineering, design failure, project management, vessel downtime, equipment delays, weather); however, a quarter of margin underperformance would erode market confidence.
As highlighted before, some market participants believe Swiber has secured contracts at the expense of margins (as the lowest bidder). The only way to answer the critics is to record good margins in the coming quarters when the contracts are being worked on. However, we argue that as it secures more work, its vessels will enjoy higher utilisation, driving up margins, as larger fixed overheads (high operating leverage business) are spread across the contracts.
We expect margins to improve in Q3 as the working season in Asia gains momentum. And the projects executed off India that hurt margins in H1 are believed to have been completed by the end of the working season in India (Q4–Q1). We forecast a Q3 EBITDA margin of 13.4%, above H1’s 9.4% but below 2010’s 15.4%.
Q3 preview USDm Q2/11 Q3/11e Q3/11e Chg y/y % Chg
Reported DnB NOR Cons* 2011E 2012E 2013E 2011E 2012E 2013E
EPS assuming bond conversion 0.01 0.021 na 0.0 88% 0.07 0.12 0.09 0.06 0.07 0.09EPS excluding bond conversion 0.01 0.027 n.a. 0.0 88% 0.09 0.16 0.12 0.08 0.10 0.12
Full-year figures (DnB NOR) Consensus
Source: DnB NOR Markets, company, Bloomberg consensus as of 7 October
EBITDA margins
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Q1/0
6
2Q
/06
Q3/0
6
4Q
/06
Q1/0
7
2Q
/07
Q3/0
7
Q4/0
7
Q1/0
8
2Q
/08
Q3/0
8
Q4/0
8
Q1/0
9
Q2/0
9
Q3/0
9
Q4/0
9
Q1/1
0
Q2/1
0
Q3/1
0
Q4/1
0
Q1/1
1
Q2/1
1
Q3/1
1e
Q4/1
1e
2011E
2012E
2013E
Source: Company, DnB NOR Markets
Order book at USD1.1bn, focus is on execution The current order book is cUSD1.1bn before Q3 2011e project recognition.
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Order backlog (USDm)
515 509
440
626
769
839
915
800
680
829
752
1103
0
200
400
600
800
1000
1200
Q1/09 Q2/09 Q3/09 Q4/09 Mar-10 May-10
Aug-10
Nov-10
Dec-10
May-11
Aug-11
Oct-11
US
Dm
Source: Company
New ordering pace exceeding expectations YTD Swiber has secured USD758m of new orders, exceeding our full-year forecast of USD602m.
Estimate revisions We have revised our new order estimates to account for the higher than expected new orders. Our new order estimates for 2012e and 2013e of USD450m are unchanged. As a result, 2011e and 2012e EPS is up 20% and 36%, respectively.
New order estimate revisions New order estimatesIn USDm Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 2010 2011E 2012E 2013ENew EPCIC orders flow assumed/ secured (historical) 3 101 23 315 143 320 0 0 0 758 - -New EPCIC order assumptions na na na na na na na na 0 850 450 500
Initial new order estimatesIn USDm Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10E 2010E 2011E 2012E 2013ENew orders flow assumed/ secured (historical) 3 101 23 315 143 320 0 0 0 758 - -New EPCIC order assumptions na na na na na na na na 0 602 450 500 Source: DnB NOR Markets
Source: DnB NOR Markets, Bloomberg consensus as of 7 October
Sector report > Asian Offshore Supply
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Projects Swiber could be targeting EPCIC projects Swiber are targeting
Region
No of potential projects
Potential value (USDm) Till year Remarks
Brunei 8 630 2016 Looking at offshore installation and IRM contracts
Indonesia 28 1,200 2016
Bidding through JV, actively bidding now, such as the offshore installation contracts for Wortel gas development, Sisi and Nubi field development
Malaysia 15 450 2016 Looking at work off SabahVietnam 15 1,000 2016 Looking at pipelaying and support work Thailand 8 300 2016 -Myanmar 8 450 2016 -Others (Southeast Asia) 6 250 2016 -
South Asia (India) 30 6,200 2016
Potentially USD1.2bn orders to be awarded this year. Currently looking at the Cluster 7 pipeline tender, the WO16 wellhead platforms installation
Middle East 30 45,000 2016Currently believed to be bidding for 3-4 projects (such as the Satah al-Razboot project, Zadco 750 project)
Source: DnB NOR Markets, Company, Upstream
Debt remains manageable Net debt as of Q2 had risen to USD392m (from USD370m in Q1). We believe this is still manageable, with USD81m of short-term debt, a positive net working capital balance of USD217m, and cash of USD107m. Net debt to equity is 1x, in line with the Q1 2011 position.
MTN notes outstanding
Issue DateMaturity
Date Amt (SGDm) Amt (USDm) Term (years) Interest rate20-Aug-10 31-Aug-12 110 88 2 5.75%11-Oct-10 11-Oct-13 80 64 3 5.80%25-Jan-11 25-Jul-14 120 96 3.5 5.90%
Total 310 248
500 SGDm310 SGDm190
Total MTN programmeUtilised MTN (drawn down)Unutilised MTN Source: DnB NOR Markets, Company
Proposed perpetual preference shares Swiber passed a resolution at the EGM on 3 October 2011 for the proposed issuance of cumulative non-voting perpetual preference shares. The plan being considered is likely to have a convertibility option into ordinary shares under limited circumstances, which will not result in dilution of more than 40% for existing shareholders. No other details (size, cost, convert terms) have been provided.
Given the limited information available, we are not able assess the impact of this potential issue. At first glance, it appears negative due to the convertibility, which could be dilutive to existing shareholders.
Focus now is not on dilution risk from CB Based on the current share price, we do not expect investors to focus on the dilution risk. The potential maximum dilution (current conversion price is at floor price) impact for Swiber is 33%, if its bondholders convert their bonds between now and 2014. The conversion probability is subject to a number of factors, such as positive share price performance and the bondholders’ entry price. However, given our fair value on Swiber is SGD1 per share, we have factored the maximum dilution impact of 33% into our estimates and valuation.
Sector report > Asian Offshore Supply
DnB NOR Markets - 124
17.10.2011
Swiber's convertible bonds Convertible bonds detailsBond ticker EH956088 CorpBond name SWIB 5 10/16/14Amount outstanding (USD) 100,000,000Coupon rate 5%Current bond price (USD) 113.275Issue date 10/16/2009Issue price (USD) 100Convertible start date 11/30/2009Convertible end date 10/10/2014Current conversion ratio 133,333Bond size (units) 1000Current conversion price (SGD) 0.864Initial conversion price (SGD) 1.08
Reset conversion price periodEach interest payment date, VWAP for up to 20 consecutive days preceding reset date
Next reset date 16 Oct 2011, semi-annualCurrent share price (SGD) 0.49Fixed USD/SGD exchange rate 1.44Min piece 100,000Price of equity based on par bond price (on Conv Ratio) 127,333Implied price of equity at current bond price (on Conv Ratio) 163,116Shares from conversion 166,666,667Current shares outstanding 508,350,000Potential max dilution 33%
Callable conditions
Callable at par after 15 Nov 2011, only VWAP for 20 consecutive days is higher than 160% of the latest conversion price
Source: DnB NOR Markets, Company, Bloomberg
Sector report > Asian Offshore Supply
DnB NOR Markets - 125
17.10.2011
Valuation and recommendation Well positioned in robust niche market Swiber has won USD326m of new contracts over the past two months. We have raised our 2011 new order estimate from USD602m to USD850m, as the USD758m of new orders secured YTD is higher than we expected. This supports our view that EPCIC tendering remains robust. The order book of USD1.1bn is expected to provide revenue visibility of close to 19 months. We argue that investors have not priced in such ordering intake and most believe that, as the lowest bidder, Swiber is likely to secure the contracts at the expense of margins. However, we argue that as it secures more work, its vessels will enjoy higher utilisation, driving up margins as larger fixed overheads (high operating leverage business) are spread across the contracts. With an enlarged construction pipe-laying and support fleet, we continue to regard Swiber as well positioned in its niche for the upcoming tendering activity in the shallow water pipe-laying markets in Asia.
Our NAV is SGD1.02 per share. We reiterate our BUY recommendation and SGD1 price target.
NAV SGD1.02/share
No Vessel Type Built Ownership
Fair Market Value
(USDm) NAV (USDm)1 Swiber Conquest Pipelay barge 420 T 2007 Lease 72 722 Magnificent Derrick crane barge 4200 T 2010 100% 95 953 Swiber SLB-1 (Holmen Arctic) Submersible barge 400 ft 2008 100% 70 704 1MAS-300 Pipelay barge 300 T 2010 50% 55 285 Swiber Concorde Pipelay barge 200 T 2009 Lease 45 456 Swiber Victorious Dive support accom barge 300 men 2009 50% 35 187 Swiber Chai Derrick pipelay barge 1100 MT 2009 49% 75 378 Aziz Derrick pipelay barge 1200 T 2009 100% 78 789 Swiber Eagle Utility towing tug 3200 bhp 2006 100% 10 10
NAV Calculation USDm MethodNAV of all vessels (including sale lease-back) 1031 Fair mkt valueNAV of yard 40 5x 2011e EV/EBITDAOther financial assetsTotal assets 1071
2011e NIBD + future capex 468Sale lease-back commitments (debt) 268Assuming conv bonds converted to offset debt 100Kreuz Subsea market value (63% owned) and Vallianz (29%) @ market price USD converted 119NAV of all assets 554No of outstanding shares 508No of shares assuming conv bonds converted @ SGD/sh 0.864 at reference rate USD/SGD 1.44 167No of outstanding shares (assuming bonds converted) 675Equity value per share (USD) 0.82Equity value per share (SGD @1.24) 1.02
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