by millionairemind » Sat Feb 07, 2009 1:38 pm
Corporate Focus
Petrobras plan good news for rig builders here
The US$174b five-year plan could bring new rig orders, contract jobs. By Vincent Wee
BRAZILIAN oil giant Petroleo Brasileiro (Petrobras) recently announced its long-awaited US$174.4 billion business plan for 2009-2013. The plan, which had been delayed twice as the state-run company weighed its options amid the credit crunch and plunging oil prices, must be good news to Singapore's two main rig builders, Keppel Corp and Sembcorp Marine, which have had a very dry fourth quarter last year in terms of new rig orders.
STRONG FOOTHOLD
Keppel says through Keppel Fels Brasil, it has strong local presence, experience and track record in Brazil
Petrobras has previously said it plans to contract 40 drilling ships and platforms to operate in deep and ultra-deep waters by 2017. Of these, 12 have been contracted so far and the remaining 28 are expected to be built in Brazil. At least three production systems in fields such as Tupi and Guara are expected to go on stream in 2012-2013, which could stir demand for floating production units.
But the concern is how many of these contracts they will be able to win and at what price. Petrobras last month cancelled tenders for two oil production platforms citing too high-priced bids given current market conditions, in a clear sign that more austere times are ahead and budgets will be closely watched despite the need to expand production capacity. The lowest bid for one of these, the P-61, was from Modec for US$1.72 billion.
'We will implement upwards of 500 projects, ensuring investments and generating jobs at the lowest possible cost,' industry website Rigzone reported Petrobras president Jose Sergio Gabrielli de Azevedo as saying. 'The preparation of the plan took the prices that were in effect in the last quarter of 2008 into account, in a scenario that was quite different from the one we currently have,' he added. 'It is not feasible for any company to keep prices at the same levels as in 2008. The economy has changed.'
The 35 per cent of total projects that are still in their conceptual phases are those that offer the best cost-reduction opportunities, Mr Gabrielli noted. 'The market foresees a 30 per cent variation upwards or downwards for any project that is in its initial study phase, and that is certain to happen.'
Deals with Petrobras are typically done in one of two ways: through direct contracts with the company or by building for companies that are in turn contracted to work for Petrobras. The direct contracts often include local content requirements of 50 per cent and above, as the state oil company seeks to help boost the Brazilian economy through its investments.
Rigzone reported that Petrobras Exploration and Production (E&P) director Guilherme Estrella expects to make investments of US$92 billion for the E&P area in the 2009-2013 period, in Brazil alone, US$26.9 billion more than the US$65.1 billion laid out in the previous 2008-2012 plan.
Petrobras expects to have the P-62 and P-55 platforms, both in the Roncador field and P-61 and P-63, both in the Papa-Terra field, in operation for 2013.
Particularly for the big US$1 billion-range production unit-type projects, both Keppel and SembMarine will be in the running with their established track records of previous projects with Petrobras and in the case of Keppel a massive yard in Brazil.
Keppel has won a string of massive floating production unit orders in the last three years, while SembMarine has also been active in the market in the past through its joint venture Maua Jurong yard. SembMarine, through its Jurong Shipyard unit, now has a strategic alliance partnership with Mac Laren Shipyard in Rio de Janeiro. The two rig builders should also benefit indirectly through jobs from contractors that work for Petrobras.
But close attention must be paid to contract values and the attendant local content requirements. While the headline numbers may impress, higher operating costs and a challenging operating environment could affect both margins and productivity, especially as local content is increased with successive projects. For example, Keppel's latest US$1.2 billion P-56 project is believed to have an almost 100 per cent local content requirement.
'While direct contracts could possibly ensure some form of contractual certainty, given the Brazilian government's backing, the heavy reliance on local content element may possibly lead to erosion of earnings' margins. We believe that higher operating costs in Brazil had eroded the Singapore yards' operating margins as exemplified by two of Petrobras' projects built at Keppel yards. This is as recent as Q408 when Keppel O&M's (offshore and marine) operating margin declined to 9.3 per cent in Q408 as Petrobras' P56 FPU reached its first 20 per cent milestone recognition,' warned a recent DMG and Partners report.
'Petrobras' investment plans are encouraging to Keppel O&M. We have worked on several important projects for Petrobras and have a win-win relationship with them. Through Keppel Fels Brasil, we have strong local presence, experience and track record in Brazil. This puts Keppel O&M in a good position to support Petrobras' plans to increase its production,' said a Keppel spokesman.
'Sembcorp Marine's venture into Brazil has been fruitful. So far, there have been notable FPSO conversion projects as well,' said a SembMarine spokesman.
Margins notwithstanding, some analysts are upbeat on the potential order flow from Petrobras. 'While direct exposure to Petrobras is around 15 per cent for Keppel and 0 per cent for SembMarine, indirect revenue through customers whose rigs are bound for Petrobras ranges between 20 per cent to 30 per cent of order book. Maintain 'buy' on Keppel Corp (target price $7.10) and SembMarine (target price $2.45),' said Deutsche Securities Kevin Chong.
CIMB-GK Research, while noting Keppel's spike after the Petrobras report, maintained its 'underperform' rating on continued cancellation and deferment risks and has a target price of $4.60 which incorporates higher O&M earnings for FY10.
'It is not time for sector optimism as downside risks persist. We advocate that it is still too early to turn buyers on the O&M sector. With no clear indication of the easing of credit markets, we opine that any significant newbuild contract will only occur in H209 soonest,' said DMG's Serene Lim, who has neutral ratings and target price of $4.48 and $1.75 on Keppel and SembMarine respectively. Keppel shares closed 15 cents higher at $4.32, while SembMarine shares closed six cents up at $1.55 yesterday.
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch
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