There's worse to come for Singapore's rigbuilders

THE world's two largest rigbuilders' third-quarter earnings may have been enough of a fright for investors already - but analysts have warned that the fourth quarter could be even gloomier for Keppel Corp and Sembcorp Marine.

Investors should still brace themselves for more potential provisions and impairments, and should expect contract wins to be few and far between for the next few years, analysts said, though they added that stock valuations already appear to be near their troughs, and earnings may also be close to the bottom by this juncture.

They also noted that since Keppel has a more diversified revenue stream than SembMarine, the conglomerate's earnings are likely to be more resilient amid the prolonged downturn than its smaller rival's.

Both Keppel and SembMarine have announced job cuts numbering in the thousands and weaker third-quarter results amid an industry-wide downturn due to a slump in crude oil prices. For the three months ended September, Keppel remained profitable overall but SembMarine plunged into the red.

Keppel earlier this month posted a 38 per cent drop in third-quarter net profit to S$225 million from a year ago and said that its rigbuilding arm Keppel Offshore & Marine (Keppel O&M) has in the three months to September cut its direct workforce by about 3,080, bringing layoffs over the first nine months of the year to nearly 8,000 or just over a quarter of its workforce. Of the 3,080 axed, 660 were in Singapore. Keppel also made an impairment of fixed assets of S$34.5 million for the period.

As for SembMarine, it last week booked a S$21.8 million net loss for the quarter, compared with a S$32.1 million profit a year ago, and said it had axed 8,000 jobs "throughout 2015 till to date". A spokesman declined to disclose how many of those 8,000 jobs were cut in the three months to September. The group also made a provision for its stake in Cosco Corp but said its provisions in FY15 for rig orders were still adequate.

Analysts said the industry outlook remains tough as rig orders have dried up and the two rigbuilders might still need to make further provisions, but added it would be difficult to quantify those potential provisions.

"We are still wary of potential impairment for contagious jackup rigs, but management sounded confident that provisions made in 2015 are adequate," CIMB analyst Lim Siew Khee wrote in an Oct 25 note.

But she told The Business Times in an email that the potential provisions for each company would depend on "what their own assumptions would be". "For Keppel, if they mothball more yards, there might be some provisions. For SembMarine, if (their) Brazilian yard does not turn around or execute any work, then impairment risk is there."

KGI Fraser analyst Joel Ng also said it was hard to calculate how much more provisions the two might make, "due to the lack of market transactions that can help indicate the values of the assets sitting on the company's balance sheets".

"Furthermore, it really depends on the company's auditors on how they work with the companies to value the assets based on their internal estimates (usually some form of discounted cash flow valuation given the lack of market values)."

Analysts added that orders may start flowing back only after the next one or two years at least.

"We believe companies are waiting for oil prices to have a sustained recovery above US$55 per barrel (bbl) or US$60/bbl before committing more capex on their exploration programmes," Mr Ng said. "But it may still take one to two years for the orders to come through to the rigbuilders given the oversupply of rigs and offshore vessels in the market."

Utilisation rates for jackup rigs, semi-submersible rigs and drillships have dropped to 50 per cent in October 2016 from 90-100 per cent utilisation in 2013, he noted.

Said Mr Ng: "If oil prices can have a sustained recovery above US$60/bbl, then we may expect that the worst is over and see a gradual recovery in the industry. But in the short term, we may expect to see declining earnings and more job cuts going into 2017."

UOB Kay Hian analyst Foo Zhiwei said low contract wins would "continue to be the case for the next few years at least because of shale . . . Future offshore development is taking a back seat for a while.

"The oil majors have in their Q1 and Q2 results continually emphasised how they will stick to short-cycle projects and unconventional sources for future production," Mr Foo noted.

"Offshore and deepwater projects tend to be mid to long-cycle projects. And shale isn't just the United States . . . you see it popping up in the United Kingdom; China is exploring ways to exploit it; Chevron has shale operations in Argentina. It would seem with this much abundance of lower-cost, faster-cycle land resources, the world's need for offshore development is diminished for the next few years."

Analysts said both Keppel and SembMarine may need to continue cutting jobs as well but that, on the bright side, the earnings slide may be close to bottoming out. They added that, of the two, Keppel appears to have better prospects.

Mr Foo pointed out that Singapore has no national oil company nor oil assets to "help our local yards with orders", and that other national oil companies would likely "rather support their homegrown companies than give the job abroad, if they can".

"So, unfortunately for both yards, they will have to readjust to this new order. And will Q4 and onwards be worse? I think very much so for both, though I must say we are near the bottom for earnings now."

Mr Ng also thinks Keppel and SembMarine are "already trading at trough valuations, and downside may be limited from here onwards".

"We believe that Keppel has better prospects amid the downturn compared to Sembcorp Marine due to its more diversified revenue base," he said. "Keppel's property business contributed 70 per cent of its profit in its latest results and it still managed to generate respectable profit margins while Sembcorp Marine reported losses in its latest results. In addition, Keppel Corp has a relatively better profile of customers in terms of their financial strength."

NRA Capital research head Liu Jinshu also said he "would favour Keppel over SembMarine", adding that "larger companies such as Keppel may contain value owing to their stronger balance sheets".

Conversely, he added, "the smaller companies may require more research before one buys in".

Keppel shares have dropped 18.74 per cent and SembMarine shares have fallen 26.86 per cent year-to-date. Keppel rose a cent to S$5.29 last Friday while SembMarine shed a cent to finish at S$1.28.

This article was first published on October 31, 2016.
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