Key catalyst to share prices is contract flow. Share prices of shipyard stocks - Keppel Corp (Keppel), SembCorp Marine (SMM) and SembCorp Industries (SCI) - may rally on rising oil prices, but the rally is unsustainable if there is no follow through with contract flow. Ytd, there have been only four jack-up rig orders and one tender rig order. There are no semi-submersible rig (semi) and drillship orders. All in all, there have been only five rig orders. This is a sharp contrast to 2008’s 60 rig orders.

Jack-up utilisation is well below 85%, the trigger point for newbuild orders. As evident in the 2003-05 period, rig fleet utilisation needs to cross 85% before shipyards can expect rig newbuild orders, provided funding is available. Jack-up utilisation in most regions collapsed further in 1H09 to very low levels of 40-60% despite rising oil prices. While floater (semis and drillships) fleet utilisation in most regions remains robust at about 90%, there are signs of some easing in recent months.

Utilisation will remain soft as rig fleet expands with newbuild deliveries. The jackup market will see a strong influx of newbuilds – 36 units in 2009 compared with 28 units in 2008 – while the semi market will take delivery of 17 newbuilds this year compared with 10 last year. Jack-up dayrates in most regions have halved since the beginning of the year. Semi dayrates have fared better, but nonetheless have declined 20-40% in some regions.

Hope is pinned on Petrobras contracts. Singapore shipyards stand a winning chance in Petrobras contracts (possibly 7-8 newbuild semis and drillships with US$5b-8b shipyard contract value in 2H09), although not without competition. Contract wins will boost short-term share prices, but a) the low margins of these contracts, b) a long construction period before shipyard profit recognition, and c) upfront cost recognition in variation orders could shift operating margins to a lower level as existing more lucrative orderbooks are progressively completed in 2009 and 2010.

Our sector rating and stock calls remain unchanged. Maintain SELL on Keppel and HOLD on SMM and SCI.