Petrobras likely to kick start the first phase of rig tendering later this month: Petrobras directors have approved on Friday the first phase of Brazilian rig building program calling for a total of 28 deepwater rigs to be built in Brazil for exploring and developing the pre-salt reserves with delivery scheduled over period of 2013 to 2017.

First round of tendering drill-ship biased; but scale, “made in Brazil" requirement should put Singaporean and Korean rig builders on equal footing: While some quarters may view the drill-ship bias as negative for Singaporean rig builders given that (a) Both SMM and KEP have highlighted their interest and willingness to undertake drill-ship projects in Brazil, (b) Tender of nine rigs should provide necessary scale to own and expand shipyard in Brazil and (c) Made in Brazil requirement does neutralize the Korean competitive edge (to some extent) in drill-ships in our view.

Potential doubling of existing order book for KEP / SMM; rig building likely to be concentrated to 3-5 shipyards: Given the rig tender structure, this will likely result in better than expected rig new order impact of 7 rigs for Singaporeans (4 for Keppel and 3 for SMM in our estimates) currently implied in our estimates. We believe PBR is likely to keep the rig building process to handful of 3-5 yards with 6-9 rigs per shipyard. Moreover this contract could potentially double the existing order books of Singapore rig builders with US$4.5-5.4 billion worth of orders up for grabs in first phase. We retain OW on KEP and SMM with a slight bias in favor of Keppel in near term given (a) potential new orders in pipeline namely P-61, Chevron TLP and semisub from PV drilling, (b) existing yard presence in Brazil.