Outlook bright for Singapore rig builders: Barclays

SMM and Keppel Corp orders to soar.

Here's more from Barclays:

Prefer Sembcorp Marine (OW; PT S$6.50): We expect 2013 rig orders for SMM and Keppel Corp (EW; PT S$13.5) to remain robust. This reflects the continued recovery in the semi-submersible markets, with higher rig count expectations and a strong recovery in day rates. We remain positive on the Rig-builders. With their strong track records in semi-sub delivery, we expect semi-subs to drive new orders in 2013.

Improving rig markets: The strength of floater (semi-subs and drillships) markets continues to improve. Our US colleagues (See: Schlumberger Ltd: Strong 2013 Outlook for Int’l & Offshore) expect significant rig count growth in the Gulf of Mexico in 2013-14. We are positive on the outlook for new orders, as the GoM remains a key market for semi-subs, with many semi-subs being delivered in 2013/14 either contracted or already spoken for. 

Attractive value and yield: We see good value in both SMM and Keppel – both are trading at c12x 2013E P/E, below their 10-year historical averages of 16x and 13x, respectively. With expectations of a multi-year capex up-cycle and unconstrained balance sheets, we see these companies offering sustainable yields of c4-5%.

Prefer SMM: valuation premium narrowing vs peers: With SMM’s valuation premium to its Korean peers narrowing, we continue to prefer this rig-builder for its pure-play leverage to the offshore rig market.

Based on current orders, there are only 17 semi-subs expected to be delivered over the next 5 years. This compares with the 56 delivered over 2008-12. The rise in deliveries during that period was a consequence of the increase in oil prices in the early-mid part of the last decade, which drove demand for increased exploration and production. We expect oil prices to remain high this decade, justifying the economics for many oil projects and driving demand for more drilling rigs. With only 17 rigs currently being ordered, we expect a pick-up in orders; especially as new capacity gets absorbed by the markets.

Semi-sub day rates have also recovered from their 2010-11 lows, especially post-Macondo, when significant excess capacity caused rates to tumble and orders for semi-subs to slow significantly. We see the outlook for new semi-sub orders improving, with day rates now at or above 2008 levels.

2013 is on track to record the highest number of jack-up deliveries in the past 30 years. With 55 jack-ups expected to be delivered this year, we expect orders of new jack-ups to take a temporary breather as the market absorbs the new units being delivered. However, even after accounting for the 80 deliveries by 2015, more than half of the world’s jack-up fleet will be over 30 years old. Hence, we believe that the upgrading and retooling of the current fleet will result in a replacement cycle that will drive further rig orders and upgrades.