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Sunday, 21 November 2010

S'pore rig builders poised to kick into higher gear

By JOYCE HOOI

LOCAL rig builders are well-placed to feast on a lion's share of the sector's recovery as orderbooks for rigs and floating production, storage and offloading (FPSO) vessels are poised to get fatter.

An end to more than two years of subdued activity is in the wings, a report put out by Citi Investment Research & Analysis on Thursday said.

'A strong pickup in rig demand, strength in FPSOs and high margin rig upgrade suggests the orderbook has troughed and is poised for recovery,' the report said.

'Contract wins could double in 2011-2012 versus 2010 to reach $4.5-5 billion.'

In addition, the Petrobras factor means that surpassing the peaks of 2007 and 2008 could be within reach.

Even as the day rates for existing rigs are increasing, the ageing fleet means that the replacement cycle is due to pick up pace.

The report noted that more than 300 jack-ups and 100 semi-submersibles today are more than 25-years-old.

Strengthening the outlook for newbuild jack-ups is the prohibitive cost of reactivating a cold-stacked rig - one that has been shut down and stored at a harbour or shipyard.

The cost of reactivating a third of Transocean's cold-stacked jackup fleet is estimated to be as high as US$60-80 million, the report noted, which would be 30-40 per cent of what it costs to build a new high-spec rig.

'Recent strength in high-end jack-ups further differentiates the distinction between old and high performance rigs. This positions Singapore rig players well, as Singapore yards have 60 per cent global market share in jack-ups,' the report said.

Of the local rig-builders, Citi analysts favoured Keppel Corp, with the view that the conglomerate had the strongest positioning among global exploration and production (E&P) peers in Petrobras' E&P programme.

Keppel's 'buy' rating was maintained, while its target price was increased from $11.10 to $12.80 by Citi.

While Citi noted Sembcorp Marine's 'strong execution and growing footprint', the stock was downgraded from a 'buy' to a 'hold' because of valuations that were less attractive, post-rally.

According to the report, Sembcorp Marine's share price has risen 34 per cent year-to-date, compared to the Straits Times Index's 12 per cent gain.

The counter's target price was increased from $4.60 to $5.60 in the report.

Its parent company, Sembcorp Industries, kept its 'buy' rating and saw its target price raised from $4.73 to $5.60, boosted by its acquisition of water firm Cascal and growing demand for electricity in the region.

'We recommend accumulating (Sembcorp Industries) since it offers exposure to cyclical recovery in the oil and gas segment . . . and growing regional utilities footprint in US, UK, Middle East and China,' the report said.

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