Seriously, Sembcorp Marine veering towards drillship is a thumbs down

Is the 7th unexpected Petrobras deal a bad move?

According to Maybank Kim Eng, it believes that concerns on lower margins have been overdone and are generally above consensus in terms of margin expectations.

The firm argues that margin pressures are valid concerns but could be cushioned by higher productivity and better product mix from more conversion and repair jobs.

"While we agree that Keppel has better opportunities for positive margin surprises, we believe that continual contract wins in 2 013 would fuel sector optimism resulting in the pure-play outperforming in terms of stock price appreciation," the report said.

The recent contract win for 2 jackup units from Oro Negro at USD217m a piece demonstrates some pricing power. In this case, Oro Negro requires the rigs fast, with the assurance of quality and timely delivery.

This could be the case in which the customer is dependent on the rigs to secure a charter contracts from oil majors. Going to an established yard like SMM gives it a higher chance of securing the charter, and also makes it easier for the asset owner to secure financing.

Here's more from Maybank Kim Eng:

While there are competitions from Chinese yards, we believe that serious drillers/asset owners may still prefer established Singapore and Korean yards.

Going into drillships a bad idea? Naysayers has criticised SMM’s move into building drillships in Brazil as a bad move, citing lower profitability due to its unfamiliarity and local content issues.

We concur with the potential for initial hiccups but we see longer term benefits. SMM is opening up a new market for itself as deeper water drilling would shift preference for more drillships and semisubs.

For this reason, SMM was able to secure a 7th and unexpected drillship from Petrobras. We believe that Oro Negro is also looking at increasing its fleet of drillships and semisubs.

New yard facility to add more repair jobs. SMM’s new Integrated yard facility could potentially double its capacity for ship repair and conversion jobs to SGD1.1-1.2b per year. These are of higher margins and can potentially mitigate other weakness.