SG Rigbuilders Sector

SG Rigbuilders Sector: Global order wins have trickled to a halt and while record-high orderbooks might provide temporary insulation against major earnings insulation against major earnings declines, rigbuilders are expected to feel the heat as their backlogs are depleted. Also, lower day-rates and utilization rates are seen across all Mobile Offshore Drilling Unit (MODUs) classes, which could prelude to lower newbuild prices.

Oil companies are cutting capex by 10%-40% YoY for 2015E as shareholders’ pressure mounts and place greater emphasis on cash conservation in the weak oil-price environment. The impact has trickled down to shipyards, with only 1 new MODU order placed globally in 2015.

The deferments of taking delivery of orders by clients will ease the pressure for owners to sign contracts at less than ideal day-rates. Although such a move by asset operators helps alleviate the oversupply situation, the burden now falls on yards, with additional maintenance and storage expenses eating into operational profitability.

Daiwa remains NEGATIVE on the sector as they foresee no catalysts for a rerating over 12 next months. Hence, the house maintains its HOLD rating on Keppel (TP: $8.76) and UNDERPERFORM on SembMarine (TP: $2.56) and SELL on Cosco Corp (TP: $0.35). The hosue prefers Keppel over SembMarine given the latter 100% exposure to O&G industry while Keppel, by virtue of its conglomerate structure, will likely ride out this industry downtown in better shape. Cosco faces the greatest risk of order cancellations, as most of its orders were placed without firm contracts from oil companies.