Espadon Jurong Drillship Design

Bears Crowd to Sembcorp After Stock’s 18% Drop

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October 12, 2014

The new rig is based on Jurong Shipyard’s proprietary Jurong Espadon drillship design. Image: SembMarine

By Jonathan Burgos and Kyunghee Park

Oct. 13 (Bloomberg) — Sembcorp Marine Ltd. lost about $1.3 billion in market value this year, making it the second-biggest decliner on Singapore’s Straits Times Index. There’s more pain to come if short sellers are any guide.

Bearish bets on the stock climbed to the highest level in more than a year after the world’s second-biggest oil-rig maker said last month it will spend an additional S$222 million ($174 million) on a new shipyard. Brent, the benchmark for more than half the world’s oil, reached a four-year low in intraday trading on Oct. 10, raising concerns that oil explorers will extend spending cuts, according to Henderson Global Investors Ltd. and UBS AG.

“The decline in oil prices is not good for the sector as a whole,” Michael Kerley, London-based fund manager overseeing Asian equities at Henderson Global, which has about $120 billion assets under management, said by phone on Oct. 10. “We sold Sembcorp Marine in the last month or two. We’re worried about the order flow on the back of the falling oil prices.”

Sembcorp Marine, whose first drillship project for Petroleo Brasileiro SA spurred investor concerns, has slumped 18 percent this year through last week. The stock is the most-shorted on the Singapore bourse, according to Markit Group Ltd. data compiled by Bloomberg. Short interest climbed to 12.6 percent of freely tradeable shares as of Oct. 8, the highest since July 2013, the data show.

More Pronounced

While shares of Sembcorp Marine and bigger rival Keppel Corp. have been affected by crude oil prices posting the biggest weekly drop since January, the impact on Sembcorp Marine is more pronounced given that it gets 99 percent of revenue from oil-rig building and ship repair, according to Aberdeen Asset Management Plc and UBS. Keppel generated about 58 percent of sales from offshore and marine engineering in 2013, with the rest coming from infrastructure and real estate, data compiled by Bloomberg show.

Sembcorp Marine’s valuations have fallen to 13.2 times estimated earnings, lower than the 14.2 for the benchmark Straits Times Index. They still exceed the 11.7 multiple for Keppel, which has dropped 10 percent this year.

Some analysts, including Low Pei Han at OCBC Investment Research in Singapore, say the recent decline in Sembcorp Marine’s share price and concerns about the building of the drillships are overdone. Low upgraded the stock to buy from hold earlier this month.

While orders for exploration and drilling units are weak, there should be demand for offshore production facilities, which could help Sembcorp Marine win more orders next year, Low said. The company’s new contracts may increase to S$4.5 billion in 2015, from an estimated S$4 billion in 2014, she said.

Sembcorp Marine doesn’t comment on share-price fluctuations, it said by e-mail.

Rising Costs

Orders for offshore exploration have slowed this year as companies such as Statoil ASA and Royal Dutch Shell Plc scaled back spending because of rising costs and stagnating energy prices. Sembcorp Marine’s contracts declined 28 percent in the seven months to July from a year earlier, while those for Keppel rose 6.7 percent in the first half, according the the companies’ latest earnings reports.

“The drop in oil prices has been very sharp and that’s affecting demand for oil rigs,” Kelvin Tay, chief investment officer for Southern Asia-Pacific at UBS Wealth Management in Singapore, said Oct. 10. “Importers like India and Indonesia are increasingly reducing their oil subsidies and then you have a slowdown in China. So where is the demand going to come from?”

Boosting Capacity

As demand for oil rigs is softening, Sembcorp Marine is in the second phase of building a new 206-hectare (509-acre) shipyard that would eventually increase its capacity by about 60 percent when it’s completed after 2020. The first stage of the project, spanning 73 hectares, includes four dry docks that began operations in August last year.

The company planned the project in 2009 on expectations that higher oil prices would spur demand. In a bid to meet that expected demand, Sembcorp Marine expanded its products to include drill ships.

“The long-term prospects are there and that’s why we’re still investors in the stock,” Chong Yoon-Chou, investment director at Aberdeen Asset Management in Singapore, said in an interview on Oct. 2 “The order book is still there, especially with commitment from companies like Petrobras.”

Petrobras ordered seven drilling rigs from Sembcorp Marine as Brazil’s state-run oil company seeks to develop the biggest oil finds in the Americas this century and double output by 2020. Sembcorp Marine is building drillships for the first time and investors are worried that profit margins may suffer should there be project delays.

“We expected to see a margin recovery which we now don’t think is going to happen,” Henderson’s Kerley said. “There are concerns on Petrobras cutting capital expenditure. Maybe orders could weaken going forward.”

(c) 2014 Bloomberg.

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