Much hope is pinned on Petrobras contracts, as rig contract flow from drilling contractors will likely remain weak. No respite in the slide in global jack-up utilisation. Our contract win assumptions for Keppel Corp (Keppel) have already factored in potential contracts from Petrobras, which historically were low margin and carried higher cost over-run risk.

Jack-up utilisation weakens further in July. In the US Gulf of Mexico (GoM), competitive jack-up utilisation weakened to 28% in July from 38% in June. A year ago, utilisation was 77%. West Africa and North-West Europe also saw weaker jack-up utilisation in July. SE Asia & Australia region’s utilisation appears to be stabilising.

Lower floater utilisation in SE Asia & Australia, but utilisation in other regions is holding up. In contrast to the jack-up market, the floater (semi-submersible rigs and drillships) market is healthy with a competitive fleet utilisation of 90% or above in most regions (the lowest is 85% in South-East Asia & Australia region and the highest is North-West Europe’s 95%). With a strong wave of 26 and 35 newbuilds to hit the market in 2009 and 2010 respectively, it remains to be seen whether fleet utilisation can remain at the current high levels.

85% utilisation the trigger point for rig newbuild orders. Ytd, Keppel has only managed to secure S$330m worth of new contracts (2008: S$5.2b; 2007: S$7.4b). This level of contract wins is below our S$2b forecast for 2009. If contract wins remain at current low run-rate, orderbook and hence, earnings will deteriorate rapidly. SMM has faired better with contract wins of S$945m ytd (2008: S$5.6b; 2007: S$5.4b). Jack-up orders are unlikely to return any time soon, while a lot of hope is pinned on Petrobras’ spending on deepwater rigs.

Awaiting Petrobras’ capex. Bloomberg reported on 8 July that Petrobras is set to receive bids from five groups competing US$4b (circa S$6b) in contracts to build the eight hulls of FPSO vessels to be used in Brazil’s pre-salt oil fields. Keppel FELs, a subsidiary of Keppel is leading one of the groups which will likely submit their proposals between 17 and 31 July and Petrobras will open the offers on 31 July. Petrobras aims to start operating the vessels in 2015 and 2016.

Intense competition. Separately, Petrobras will need 28 more drilling rigs (semi-submersible rigs and drillships) over the next five years (5-6 per year) as part of its expansion. Competition will be intense. Of the 12 rig contracts awarded by Petrobras in 2008, only one was secured by Singapore. South Korean shipyards benefitted the most as most of the contracts were for drillship newbuilds.

Lower margins. Petrobras is now preparing to issue tenders in 3Q09 requesting the provision of as many as 7-8 newbuild floaters for contract start-up from 2013, according to ODS-Petrodata. We estimate shipyard contracts could total US$5b-6b (circa S$7b-9b). However, history has shown that for shipyards, Petrobras projects typically have a lower profit margin than projects for other customers. This is evident in the EBITDA margin trend of Keppel Offshore & Marine (Keppel O&M), the shipyard arm of Keppel. Petrobras contracts also carry a higher cost over-run risk.

However, our earnings forecasts for Keppel have already factored in S$2b and S$3b contract wins in 2009 and 2010 respectively. Ytd contract wins of S$330m are below our 2009 S$2b estimate. Our forecasts have already factored in some of the potential contract wins from Petrobras. If these contracts do not materialise, there would be earnings downgrading.

Global jack-up utilisation weakens further in July, with US Gulf of Mexico faring the worst as utilisation collapses to 28%. Maintain SELL on Keppel (Fair: S$5.90) but HOLD on SMM (Fair: S$2.60) and SCI (Fair: S$3.20).