Rig order updates – KEP has announced its US$405mn semi-sub order from Scorpion Offshore will be terminated. In addition, Seadrill has also announced it has made certain amendments to the four jack ups placed with KEP and SMM: revising the milestone payment schedule for the first two rigs with KEP and SMM and postponing the remaining milestone payments for the second units at both yards until delivery (please see page 2). KEP's contract with Lewek has also been cancelled. Currently, KEP’s order book stands at S$10.8bn, while SMM’s remains close to S$10bn.

Implicit yard financing an emerging issue – Although investors could take comfort in the fact that only ~50% of KEP’s S$1.2bn orders previously under review have now been cancelled, the deferral of milestone payments by Seadrill for the second units (with no corporate guarantee) heightens the risk profile. This could suggest cash-rich Singapore yards are leveraging their balance sheet strength to selectively finance certain projects during the construction phase.

More cancellations/variations likely – The sharp decline of oil price by ~73% from the peak and the effects of the credit crunch have sharply reduced E&P spending and corresponding equipment capex. We fear more order cancellations and variation of contract agreements will take place, especially for orders placed in 2008 for delivery in 2011 and beyond where work has not begun. We estimate about 40% and 50% of KEP’s and SMM’s orderbook was contracted in 2008.

COS order cancellations accelerate – COS has announced the cancellation of another two bulk carriers, bringing the total number cancelled to four. Delivery of another two bulk carriers will be postponed (total = nine so far). COS had earlier warned that FY08 earnings will be lower than FY07 on i) provision for doubtful debts; ii) increased operational costs; and iii) provisions for payment of penalties due to delivery delays. We are reviewing our earnings estimates for COS.

Stock recommendations – We reiterate our Sell rating on SMM (3H – TP S$1.25) as it is most leveraged to the rig capex cycle and current valuations are too expensive in our view, considering the earnings and industry risks. We maintain our “Hold” on KEP (2L) and COS (2H) as much of the bad news has already been priced into current valuations.