We are sellers of the Singapore-listed shipyards: The only fundamental driver for the recent rally in the O&M names we can identify is the 40% rise in the oil price since mid-February. None of the other O&M or other leading indicators we track have improved. We keep our forecasts and price targets broadly unchanged. As we now have 29% and 31% downside to our targets for Sembcorp Marine and Keppel, respectively, we move both to Underweight from Equal-weight, which we think are out of consensus ratings. SCI moves to Equal-weight from Overweight.

Oil price rise is a false dawn for the yards, we think: In the last five years, the rising oil price has been a good proxy for oil demand, which drives demand for new oil rigs. But the recent oil price rally has been fueled by falling supply and inflation hedging activity. We don’t think it heralds an early rebound in new rig demand. We remain comfortable with a rebound in oil demand driving new rig orders in 2011, but at lower levels and margins than we saw in 2007/8. It is hard to make a case for medium term EPS growth for these names, in our view.

The rig market remains well/over supplied. Oil rig utilization rates have dropped from the mid 90’s in mid 2008 to 87% today. Since only 59% of vessels being built today have charters in place, rates could come under further pressure. The deepwater floater market looks tight, but we don’t see scope for incremental semisubmersible demand to plug the ‘jack up revenue hole’ that the yards will face starting in 2010.

These stocks are not cheap: ROEs implied by today’s share prices exceed our Base Cases. In fact, only with our Bull Cases could we argue for strong upside, and then only for SMM and SCI. But the Bull Cases pencil in fairly small order dips in 2009/10, followed by record order intake in 2011. We think other segments in the energy space, such as contractors, offer better value, especially if global stimuli bring oil demand forward.