Sembcorp Marine

Sembcorp Marine: SMM’s PPL Shipyard has secured a US$220.5m order from BOT Lease Co. Ltd. (BOTL) for a Pacific class 400 jack-up rig. The rig, which will have the capability to operate in water depths of 400 ft and drill high pressure high temperature wells in depths of 30,000 ft, is scheduled for delivery in end-Jan 2015. BOTL is a leasing company under the Mitsubishi UFJ Group. Margins are expected to be high given that the Pacific Class 400 rig is a proprietary design of SMM, and SMM has already deliver 6 rigs of the same design, with 7 currently in construction. Notable points are: 1) Order is 6% higher than previous 3 rigs of the same design (although it excludes cost of BOTL’s project management team and pre-operations cost); 2) A possible revival of orders from Japanese companies, with last orders in May 2005; 3) Russia and Japan have signed a deal yesterday to jointly explore and develop an oil & gas field off Russia’s Far East coast, estimated to hold ~3.4b barrels of oil (60% of Norwegian Barents’ estimated 5.9b barrels of oil) With this new order, SMM’s new order wins for the year now stand at ~$2.7b (54%) vs street’s expectations of $5b. The strong momentum for offshore drilling as oil prices sustains above US$100/bbl, together with rising activity levels in regions such as Mexico and the opening up of new areas to offshore drilling in Brazil, Australia and Indonesia, should continue to drive demand for new-build rigs. Last closing price of $4.37, SMM trades at 16.8x trailing P/E and 3.6x P/B. Street consensus has 12-month TP of $4.86 (implies 11% upside).