Financial reasons to like it. This contract is not a speculative build as it comes with a US$958m five-year contract with Mexico's National Oil Company, Pemex. A check with industry research site, Rigzone, indicates that the rig has full asset financing arranged by Lloyds TSB Bank. Moreover, SMM has received a deposit for the rig as well as a "favourable schedule" of regular payments. This reduces the risk of bullet payments and will smoothen out the contribution to SMM's earnings.
Operational reasons to like it. Rigzone has also indicated that the original yard slated to finish the work was to be the Haverton Hill Yard. In obtaining this contract (and its option for the second rig) from Haverton Hill, SMM effectively authenticates its strength as one the leading rig yards in the world, providing on-schedule, on-budget deliveries of new generation rigs. While SMM has not constructed this particular rig design, it has experiencewith finishing bare-hulled jobs, evident from its May 07 contract with Noble Drilling. Completing this project will add another feather to its cap for building experience in an array of rig models. To top it off, SeaDragon is a new customer.
Better sentiments but remain cautious. This win puts some ease into our estimates but SMM still has another S$1b worth of wins to catch up with our forecasts for FY09. We have bumped up our valuation peg to 11x FY09 PER (prev. 10x) as positive sentiments on the Oil and Gas sector have somewhat returned. While our fair value is now raised in tandem to S$2.02 (prev. S$1.85), we remain cautious on the 68% rise in share price since its low on 3 Mar 09. As such, we are downgrading our rating to HOLD, purely based on valuations. Sustained rise oil prices along with an accelerated pace of contract wins will incentivise us to nudge our valuations upwards.
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