Anyone else interested in Brazil Oil?

Keppel Attracts SunAmerica as Cheap Way to Brazil Oil (Update1)

By Kyunghee Park

May 26 (Bloomberg) -- Brazil's push to find $135-a-barrel crude in water more than 2 kilometers deep is prompting AIG SunAmerica Asset Management Corp. to invest in Keppel Corp., the world's biggest oil-rig maker.

Jersey City, New Jersey-based SunAmerica Asset, owned by American International Group Inc., bought 865,000 shares after a 24 percent decline in the first quarter, according to regulatory filings. Since then, Singapore-based Keppel has climbed 19 percent, five times as much as the Straits Times Index. The shares, priced 19 percent below smaller competitor Sembcorp Marine Ltd. based on estimated 2009 profit, may rise 27 percent to S$15 over the next 12 months, according to Merrill Lynch & Co. analyst Melinda Baxter.

``Demand for rigs and floating platforms will continue to be robust for at least the next four to five years,'' said Soo Hai Lim, a member of the emerging-markets team responsible for $12 billion of Asian equities, including Keppel, at Baring Asset Management Ltd. in Hong Kong.

``We favor Keppel and Sembcorp Marine because they are the leaders in the industry,'' said Lim, whose firm is a unit of Springfield, Massachusetts-based MassMutual Financial Group.

Untapped Reserves

Keppel is selling more deep-water rigs, which are twice as expensive as those for shallower water, as supplies tighten amid an intensifying search for untapped reserves further from shore. That helped the company post profit margins last quarter that were 1.9 percentage points wider than Sembcorp Marine's, according to data compiled by Bloomberg.

Of 20 analysts surveyed by Bloomberg, 16 recommend buying Keppel and four say to hold it. The company's offshore and marine unit accounted for half of first-quarter net income.

Keppel dropped 2.4 percent to S$11.52 as of 11:20 a.m. in Singapore. Sembcorp Marine fell 3.6 percent to S$4.32.

Petroleo Brasileiro SA, Brazil's state-owned oil company also known as Petrobras, plans to order 40 drill ships and platforms worth about $30 billion for delivery by 2017 after finding the Tupi field, the largest Western Hemisphere discovery since 1976. The field may contain 5 billion to 8 billion barrels.

``We are likely to see order-book momentum picking up again in the short term,'' Winnifred Heap at JPMorgan Chase & Co. in Singapore wrote in a May 21 note. The analyst rates Keppel and Sembcorp Marine ``overweight.''

An offshore platform takes as long as 32 months to design and build after a contract is signed. That means Petrobras will continue to award orders until 2014 to meet a 2017 delivery target, according to analysts.

More Spending

Keppel and Sembcorp Marine may capture 27 percent of the global market this year for semisubmersible rigs, which use anchors weighing more than 10 metric tons, JPMorgan said.

Petrobras, based in Rio de Janeiro, said May 21 it struck oil in a well in 2.1 kilometers (1.3 miles) of water off the coast of Sao Paolo state. The company has leased about 80 percent of the world's deepest-drilling offshore rigs to explore that find and other prospects.

The head of Brazil's oil agency said last month that the nearby Carioca field may hold 33 billion barrels of crude, making it potentially the world's third-largest. Petrobras is evaluating the field and hasn't confirmed the estimate.

Such findings may require even more offshore-equipment spending, Petrobras Chief Financial Officer Almir Barbassa said May 21.

Oil companies including Exxon Mobil Corp., Royal Dutch Shell Plc and BP Plc will spend a record $98.7 billion this year on exploration and production, more than quadruple the amount eight years ago. Crude oil rose to a record of more than $135 a barrel on May 22 as OPEC ministers said they could do nothing to stop a rally that may be heading to $200 a barrel.

Jumping Prices

``The underinvestment in the 1980s and '90s in the industry gave rise to this jump in the oil prices,'' Choo Chiau Beng, Keppel's senior executive officer, said April 24. ``There will be demand for offshore equipment.''

Keppel, whose Brazilian yard is the largest in the Southern Hemisphere, has completed projects for Petrobras that produce more than half the country's output of 1.8 million barrels a day, according to Keppel's Web site.

The Singapore company's S$11.8-billion ($8.69 billion) backlog at the end of March includes a $1.2 billion Petrobras contract for a semisubmersible platform.

Demand for the offshore units has pushed up prices the past two years. Samsung Heavy Industries Co., the world's second- largest shipbuilder, won a record $942 million order for a drill ship earlier this month from Stena AB, owner of Sweden's biggest ferry company.

Rising Costs

Higher labor and material costs associated with construction of the P-51 offshore platform for Petrobras helped push Keppel's fourth-quarter operating profit, or sales minus the cost of goods sold and administrative expenses, down 40 percent. That prompted DBS Vickers Securities to advise caution on the shares.

``We are still avoiding Keppel for the moment,'' the Singapore firm said in a May 22 note. It has a ``hold'' rating for Keppel.

Even so, investors say the tight yard capacity and higher fuel prices will translate into more offshore-equipment orders, extending the industry's boom.

``The upcycle for offshore equipment, like drill ships and offshore platforms, has just started,'' said Park Hyoung Ryol, who helps manage $1.2 billion, including Samsung Heavy shares, at Consus Asset Management Co. in Seoul.

To contact the reporter on this story: Kyunghee Park in Seoul at kpark3@bloomberg.net