SG Rig Builders

SG Rig Builders: Citi has sector report. Note that earnings intact despite rising headwinds. After a period of resilience, O&M sector outperformance has started to reverse sharply amid growing concerns over likelihood of a double-dip recession. Sell-down has brought valuations back closer to Aug 08 levels, and could provide a floor to the share prices in the near term.

See risks to E&P capex spend in 2012 and rig demand to moderate; however, expect sector earnings will remain intact and valuations look inexpensive. Oil prices at current levels remain conducive for E&P investments. Fundamentally, house does not expect a repeat of a Lehmanstyle systemic collapse to occur. Add that SG rig builders better positioned currently vs 08-09 downturn for following reasons:

i) back end loaded payments with yards financing the working capital
ii) better quality customers with lesser proportion of speculators
iii) Day rates have bottomed and currently on an uptrend vs the peak levels witnessed in 2008.

House maintain 2011 orderbook estimates but cut sector order win 2012-13E forecasts by 14-25%. Still prefer Keppel and believe it is better positioned than many regional yards in the event of a sharp slowdown given i) higher margin prospects ii) stronger backlog iii) lower downside from a valuation standpoint.