3 reasons behind SembMarine's bullish orders ahead

The $135m rebuilding contract with Diamond Offshore opens possible projects for the rigbuilding mogul.

According to Barclays Research, Diamond Offshore's award of $135mm to Sembcorp Marine for the rebuild of a 2nd Generation semisubmersible was the second contract win for the company in two weeks. While this is a relatively small contract (c2%) for SembMarine's S$8.9bn YTD order wins, we believe the contract is still incrementally positive for the company.

Here's more from Barclays:

There have been positive comments from the deepwater drillers over the US earnings season suggesting that there is no more rig capacity available in 2012, and 2013 looks increasingly supply-constrained. We believe this could incentivize more drillers to pursue similar upgrades to have capacity available in 2014, which would support further orders for the rig-builders such as SembMarine.

Current project economics favourable for further orders: The contract involves the upgrade of Diamond Offshore's cold-stacked (2nd Generation) semisubmersible unit to a 4th Generation unit. Our US analysts estimate that the after-tax ROI of mid-20s compares to the current new build project economics in the mid-teens to low 20s, assuming dayrates of c$490k/day. We believe this could incentivize drillers with stacked units to consider upgrading their fleets to position themselves for 2014 projects.

Newbuild constraints due to tightening yard capacities: Yard capacities are increasingly tighter, with limited yard slots for 2014 deliveries of semisubmersibles/drillships and yards indicating that slots for delivery of new build semisubmersibles are likely to be in late-2014/early-2015. We believe there could be further upgrade contracts, as deepwater rigs set for delivery in 2014 continue to receive contracts and as market conditions continue to strengthen, as highlighted by our US analysts.

Existing customers could return: Transocean (OW, PT: $75), Atwood (not rated) and Noble Corp (OW, PT: $48) have been key customers of SembMarine and we believe SembMarine would be well positioned to benefit from any further upgrade orders.

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