O&M

Newswires reported that two drillships were recently sold at substantially below their original prices:
1) Greek owner Ocean Rig bought a 6th gen drillship built in 2011 for US$65m. Original construction cost was US$682m.

2) Seadrill sold a state-of-the-art drillship built 2011 for US$210m. Original price tag was above US$860m.

Although one may say the above could be distressed one-time sales, all that is needed for the industry to turn further south is a few desperate players to undercut pricing.

This validates Maybank KE's concerns on Keppel Corp and SMM's outstanding contracts, on how much the yards could sell their rigs if clients default. As a gauge, Sete Brasil units were contracted at US$800m a piece in 2011/12.

While bulls may argue that these yards made huge profits during the GFC by reselling when the market turned around (while pocketing the forfeited downpayments), this time round would be starkly different, even with the 20% downpayment collected.

Maybank KE remains negative on the Singapore O&M space and expects the street to continue downgrading their earnings' expectations for the sector. The house has Sell calls on Keppel Corp (TP $4.42) and SMM ($1.00). Although oil prices have rebounded from Jan lows, it is still insufficient to induce investments in new rigs.