Cosco Research Report

by DMG & PARTNERS SECURITIES (16 July)

COSCO Corp had announced that it has signed a Letter of Intent with Sevan Marine (Sevan) to exercise the option attached to the Sevan Driller rig contract awarded in Q107. This option entails the hull construction (Phase 1) as well as assembly and outfitting (Phase 2) of two additional Sevan drilling units, based on Sevan's proprietary Sevan 650 design.

However, we understand that the exact terms of this option contract have not been finalised as Sevan is intending to pursue beyond the option given that is for Cosco to build the entire semi-submersible on a turnkey project basis instead of merely constructing the hull.

What's for Cosco? Phase 1 of the first Sevan drilling unit (Sevan Driller) would be taking approximately 11 months, with expected completion in September 2008. Should Sevan solely award Cosco with the construction of the hull, we note that Cosco would be able to construct it in less than 11 months.

We estimate the contract for each newbuild to be US$200 million (20 per cent more than Sevan Driller). Separately, Cosco would be providing Sevan with six more similar options, which could potentially add US$1.6 billion to Cosco's order book if all options are exercised.

We understand that Sevan is negotiating with Cosco with regard to building the drilling units on a turnkey basis, which may include procuring the drilling package. While turnkey projects are larger in contract value (approximately US$600 million), such projects do involve significantly higher risks with much onus on Cosco.

Key risks to this turnkey project include yard execution risk and competitive delivery dates. We note that Sevan has secured two drilling contracts, a six-year Petrobras contract with start-up by 2012 and a three-year ONGC contract with drilling commencement in early 2011.

We believe the tight delivery deadlines are too stretched for a relatively young yard like Cosco to take on. However, should Cosco agree on the turnkey projects, Cosco would offer Sevan six further options on turnkey basis which could possibly bring Cosco's orderbook to US$4.8 billion when all options are exercised.

-Research Report by DMG & PARTNERS SECURITIES (16 July)