TAKING THE PULSE: Singapore rig builders are likely to report higher second-quarter net profits amid a steady rise in orders as drillers replace old fleets and step up exploration and production activities to take advantage of high global crude oil prices.
Analysts expect the world’s two largest rig builders by market share–Keppel Corp. (BN4.SG) and Sembcorp Industries Ltd. (U96.SG)–to continue to receive strong orders for rigs in 2011, which will boost their profits after the next two to three years.
“As the offshore and marine earnings are driven by orders received two to three years ago, actual earnings are likely to be a non-event. We expect investors’ focus to centre on forward order momentum, progress of inroads into drillship operations, available slots for 2013 deliveries (and) current status of outstanding options,” BNP Paribas said in a note on Keppel’s earnings.
However, analysts said that a sharp and sustained fall in global crude oil prices if the global economy slows significantly may hurt drillers’ exploration and production plans. That may cut new orders or discourage firms from exercising options for rigs.
COMPANIES TO WATCH
Keppel Corp. (BN4.SG) – July 21
Market Expectations: Five analysts polled by Dow Jones expect second-quarter net profit to rise 1.0% to S$350.8 million from S$347.3 million a year earlier. Revenue is predicted to rise 6.3% to S$2.55 billion.
Key Issues: Keppel is likely to benefit from orders from Brazil’s Petrobras, which is likely to award 21 new deepwater rigs this year after the process was delayed. Analysts expect the rig builder to secure a record level of new contracts in 2011. The company’s orders in hand grew by more than S$7.4 billion in the first six months of the year, matching its annual record for new orders, which was set in 2007 when new orders totaled S$7.4 billion.
However, the company’s net profit margin is likely to dip because of higher raw material costs and lower prices quoted for new contracts.
Market Expectations: Four analysts polled by Dow Jones expect second quarter net profit to rise 13.3% to S$182.7 million from S$161.3 million. Revenue is expected to rise 16% to S$2.49 billion.
Key Issues: Analysts expect more orders for the marine and offshore unit of Sembcorp Industries, though it has lagged its bigger rival Keppel so far this year. However, they say cost overruns could hurt margins and earnings. The company is also exposed to foreign exchange risk as its revenue is in U.S. dollars, a currency that has fallen 5.4% since the beginning of the year after shedding 8.6% in 2010 against the Singapore dollar, the reporting currency.
Sembcorp may also see weaker order flows if oil prices fall further, as lower prices usually result in lower exploration budgets.
In the utilities business, continued global economic uncertainty and any slowdown in China can hurt Sembcorp Industries, analysts say.
-By Gaurav Raghuvanshi, Dow Jones Newswires