Credit woes hit rig builders. Keppel Corp has received indications fromSeadrill, Scorpion Offshore, and Lewek Shipping, that their respectivecontracts signed in mid-2008 are now put under review for mutuallyacceptable arrangements (please see page 2 for contract details). These arestrong hints that the global credit crunch has extended its grasp tooffshore rig building sector.

Changes to payment structure or delivery dates are more likely. We see there-scheduling of payment structure or vessel delivery dates as more likelyscenarios, as they address the cash flow issues faced by clients. Thehindrances to order cancellations are the loss of deposits and milestonepayments, and the longer-term opportunity cost of missing out on imbalancesin oil demand/supply in the next 2-4 years. Rig builders are unlikely tore-negotiate the contract prices, as most of the critical equipment costshave been locked in.

Higher delivery delay possibility for contracts at early stage ofbuildiing, due to lower cash collection. We see the orders for deliveryfrom 2H 2010 for jackup rigs and 1H 2011 for semi-submersible rigs athigher probability of being delayed, with an estimated <30% of cash flowper contract collected by end 2008. These represent 43% of SembCorpMarine's (SMM) combined value for secured contracts, and 34% for KeppelCorp (KEP).

Keppel Corp has a more diversified order book and less levered clients. KEPhas a more diversified customer base, with 44% of total secured orders ofS$17.5b for delivery after end 2008 exposed to its top 3 customers likeEnsco, Skeie Group, and Petrobras. This is less than SMM's 55% exposure toLarsen, Seadrill, and Atwood for its total secured orders of S$11.9b. Wealso estimate that KEP has 23-30% of secured orders exposed to the morelevered clients, vs. at least 45% for SMM.

News flow to worsen before it gets better. The rig builders are expected tobe increasingly vulnerable to order delivery delay concerns. We now assume12% of KEP's order book to be exposed to delivery delay, and a higher 15%for SMM, as captured in our lowered earnings forecasts. SMM is downgradedto HOLD with fair value at S$1.90, using 8x FY09 PE for offshoreconstruction business. KEP is downgraded to FULLY VALUED, with fair valueof S$3.58 due to similar reasons.