atans1

2 of Temasek’s Fab 5 looking sickly?/ Meng Seng’s financial counterpart

In Energy, Financial competency, Temasek on 13/01/2016 at 5:14 am

In 2013, I recommended investing in Temasek’s Fab 5 for KS types. Last June I pointed out problems at two of them Keppel  and SembCorp Marine because of lower oil prices.

The rot continues as Bloomberg reports

The last time Singapore’s marine services industry was staring at what would eventually turn out to be an 18-year drought in demand for oil rigs, Mr Ronald Reagan was starting his second term as US President.

Jack-up rigs, used to drill for oil in shallow waters, saw orders evaporate between 1985 and 2003. As Macquarie notes, rampant overcapacity means such a prolonged slump could well occur again. That definitely would not be good news for the rig-building industry’s two Singaporean leaders – Keppel Corp and Sembcorp Marine.

After a decade-long boom, there were zero new orders globally for jack-up rigs last year. With oil prices swooning, and rigs’ daily rental rates having crashed to US$92,000 (S$132,000) from US$130,000 in 2014, there’s a risk that 70 per cent of Keppel and SembMarine’s order book might get cancelled, especially if the Petrobras bribery scandal in Brazil deepens, Macquarie analysts Somesh Kumar Agarwal and Justin Chiam wrote this week.

… rig-builders’ shares may have to give back much of the China-induced exuberance of the past decade. That could be quite painful for investors, including Temasek.
… owns a little less than half of SembMarine’s parent, Sembcorp Industries, and 21 per cent of Keppel, Bloomberg data shows. It can’t be feeling very chuffed about the 47 per cent slump in SembMarine over the past year, or Keppel’s 26 per cent slide.  

And there might be more trouble ahead. Since early 2004, the two stocks have returned about 300 per cent, thanks primarily to hefty dividends. Those might now start thinning out. According to analyst estimates compiled by Bloomberg, Keppel’s dividends will shrink by as much as 11 per cent over the next three years, compared with annualised growth of 3 per cent over the past three.

No orders coming in doesn’t augur well for shareholders, who will be far behind debtholders in getting paid, and the latter will have substantial claims. Oil- and gas- linked companies with outstanding Singdollar-denominated bonds have to refinance or repay some $625 million of notes this year, a further $390 million in 2017 and $700 million in 2018, Bloomberg-compiled data shows.

The other big risk comes from the duo’s Brazilian yards. Japanese shipbuilders like Mitsubishi Heavy are cutting their losses and exiting as the Petrobras saga drags on. 

Stock in Ensco, the London-based owner of shallow and deepwater rigs, has been hit after Petrobras said it was scrapping a contract in the US Gulf of Mexico because, it claims, Ensco knew about improper payments between a shipbuilder and a consultant when the drillship was constructed, a charge Ensco denies.

Analysts are being predictably slow in sounding the alert. Their median price estimate predicts a 25 per cent jump over the next year in Keppel shares, and a 15 per cent climb in SembMarine.

So far factual or fair comment. But I think the Indian FT* writing for Bloomberg is talking rubbish when he talks of Temasek selling out. Our rig-builders are market leaders, not has-beens like NOL And the oil sector is a cyclical sector, not a declining sector.

Were that triumph of hope over experience to prove elusive, what might Temasek do? It recently decided to sell shipping company Neptune Orient Lines to CMA CGM at $1.30 a share, after having paid as much as $2.80 in 2004 to acquire a part of its 67 per cent stake.

If the Macquarie analysts are right about Keppel and SembMarine eventually trading below book value, like South Korean yards do, then there may not be much point in Temasek’s hanging on to the rig-builders either.

http://www.bloomberg.com/gadfly/articles/2016-01-07/keppel-and-sembcorp-marine-may-bear-the-brunt-of-vanishing-demand

What strholders of SembCorp Marine should be concerned is that SembCorp privates Marine. About 15 yrs ago Keppel did that to FELS.

———

*He’s the analyst equivalent of Goh Meng Seng (three GEs, three different parties, and a declining share of the vote). This FT has in the same period worked for Bloomberg, MediaCorp, Reuters and now Bloomberg again. Oh and the last time this FT was working for Bloomberg, he and Bloomberg had to pay damages to one of the Lees, can’t remember which.

As Goh Meng Seng is an exemplar of the traditional oppo politican, this FT shows that T can stand for “Trash”.

 

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