Industry data indicates that day-rates and utilization rates for rigs have been declining. Besides dampening demand, this also raises the risk of more customers defaulting on their rig orders. SMM has already faced two defaults, but will likely avoid a loss by selling the rigs in the open market. However, if rig prices soften in tandem with day-rates, this may no longer be sufficient in order to protect itself fully against default risk.

Recent developments at Petrobras may cause further delays in its awarding of tenders. Brazilian President Lula de Silva has proposed new oil regulations to grant the government greater control over new deep water fields, and that oil revenues have to be spent on domestic social programs. These proposals are likely to be a political hot-button topic ahead of elections in October 2010. Petrobras is also planning to an estimated at US$25-50bn, in support of its US$175bn investment plans.

These two developments are likely to strengthen Petrobras’ position in the long term; however, the uncertainty generated in the near term may delay the awarding of tenders for equipment. Petrobras has a planned equipment capex budget of US$30bn, making them the single largest potential customer in the current soft offshore market. This position of strength and a more competitive environment also gives Petrobras more leverage in negotiating down prices, to the detriment of shipyard margins.


Both Keppel Corp’s Offshore & Marine and Sembcorp Marine have done well from the offshore up-cycle in the last 3 years. However, they are currently running down its current orderbook, and we expect earnings to decline from 2011 onwards, barring renewed order flow. We prefer Keppel Corp over SMM due to its more diversified earnings base, but maintain both stocks at Hold.

We had previously included Cosco as a potential offshore play, due to its low cost base, strong ambitions and growing technical expertise in the area. However, we believe that Cosco has missed the offshore cycle completely. We retain our Sell recommendation to target of S$0.81, due to shipbuilding execution issues, and a soft bulk carrier rates impacting both demand for newbuilds and charter rates for its fleet of 12 bulkers.


We recently initiated coverage of Ezion. We like the fact that Ezion identifies and capitalises on niche opportunities in the offshore space, and its projected 3-yr earnings CAGR of 109% pa is testament of this. We maintain our Buy recommendation to a target price of S$0.99.