Semb Marine Research Report

by BNP Paribas (2 Dec)

LOWER but not low oil prices: We believe it is reasonable to question the general outlook for the oil industry following the recent news about potential order cancellations at Keppel Corp.

For Sembcorp Marine (SembMarine), we are concerned if the offshore orders would decline drastically and coupled with order cancellations would decimate the order books.

Seadrill, a client of SembMarine, is facing difficulties in getting financing for some of its offshore orders with SembMarine. This is resulting in a potential order cancellation by Seadrill.

Analysis of Seadrill's financials gives us a better picture of the underlying situation. Seadrill's profit & loss and cashflow positions are good, indicating strong underlying business fundamentals. For Q3 2008, net profit increased 211 per cent y-o-y to US$69 million. Operating cashflow stood at US$730 million (up 12 per cent y-o-y).

It was poor corporate finance decisions that led to difficulties. Net gearing in Q3 2008 was 163 per cent, up from 122 per cent q-o-q. There are also other factors working against it - total return swaps, aggressive off-balance sheet financing and large equity investment stakes.

Oil prices have now declined for the fifth month since its high of US$147 per barrel in July 2008 and yet rig utilisation and day rates are still strong. Our positive argument for SembMarine is dependent on the recovery of overall market sentiment and not earnings.

Also, lower oil prices at US$50-60 per barrel are not only sustainable for oil producers, they ensure that costs for most economic activities will be lower in 2009. We believe cost deflation will be the first step in market sentiment recovery.

Lower oil prices will not only keep demand alive but also keep alternative energy out, and make it easier for producers to undertake long-term exploration decisions. This in turn will ensure SembMarine stays sustainably busy.

Valuation presents opportunity; SembMarine continues to trade well below the historical period of 1997-2003. Our TP remains at 12 times 2009 PE. The dividend yield is attractive at levels above 10 per cent.

-Research Report by BNP Paribas (2 Dec)