Petrobras sinks two bids (not SMMs)

Produced by: The Royal Bank of Scotland Asia Securities (Singapore) Pte Limited

Upstream reports indicate Petrobras has disqualified two of the seven  commercial bids for its 28-rig tender, and that both Keppel and Sembcorp Marine  (SMM) have made the cut. This brings Keppel and SMM two steps closer to potential orders of Petrobras' seven drillships, in our view. Maintain Buy on both.

Petrobras disqualifies two bids on price

• According to Upstream, Petrobras has disqualified the two highest-bidding shipyards in the running to supply the 28 drillships.

•  Estaleiro EISA Alagoas and Andrade Gutierrez were disqualified, with respective bid prices of US$5.49bn and US$5.77bn rated "evidently excessive" in a Petrobras communique to all bidders.

• Five contenders are left in the running, with Estaleiro Atlantico Sul (US$4.65bn) having the lowest bid, followed by Alusa-Galvao (US$4.68bn), Keppel Fels (US$5.17bn), SMM ((US$5.18bn) and Odebrecht-OAS-UTC (US$5.31bn).

Upstream says that the commercial qualification of five bids gave some observers the impression that Petrobras may accept more offers than was first thought.

The communique also states that Alusa-Galvao (the second-highest bidder) has been called into meetings with Petrobras to clarify the commercial aspects of its bid. This consortium is inexperienced in the offshore sector, leading to predictions that Petrobras may exclude it.

Positive for both Keppel and SMM

The news indicates that both Keppel and SMM are well on their way to win orders from Petrobras, in our view.

We believe the news may be construed as being more positive for SMM, which was initially reported to have lost its place in the race, after coming in with the fourth-lowest bid, according to some analysts.

Buy Keppel (TP S$13.00, 19% upside) and SMM (TP S$5.50, 11% upside)

We believe both Keppel and SMM’s shares will continue to re-rate as order flow increases.

Consensus still is in the process of factoring in the full extent of potential Petrobras orders (both rigs and production platforms, which are reported to be at least 40 by Upstream) or the increase in demand for high-end jack ups.

Keppel is trading at 2011F PE of 14.6x and PB of 2.3x for an ROE forecast of 16.6%, while Sembcorp is trading at 2011F PE of 18.7x and PB of 4.2x for an ROE of 24%. These levels should not hinder further re-rating, in our view.