According to our industry checks, Tees Alliance Group was supposed to construct the topside in Haverton Hill shipyard in Teesside, UK, with the support of international drilling contractor KCA Deutag (part of The Abbot Group). The order by SeaDragon was significant for the UK, as it would have been the first rig to be constructed there after many years. However, despite the consortium completing a quarter of the rig already, industry independent news provider Upstream reported that SeaDragon apparently pulled the contract in favor of Sembcorp Marine after a UK bank withdrew its asset funding. While the market may view the order win favorably, especially given that Sembcorp Marine had none in 1Q, we remain cautious. Little is known about the start-up SeaDragon, other than its rig contract win by Pemex, as well as another rig hull under construction; Bloomberg also reported in early Sep 08 about an aborted sale of SeaDragon to Indian-listed Great Offshore. We are concerned about order quality, as we see potentially higher order book risk with the start-up order win and believe that financing could be an issue.
Retain Sell (on Conv list); our 12m P/B-based TP of S$1 implies 53% downside. Valuation appears rich at 2009E P/BV of 2.9X, vs. historical avg of 2X, trough of 1X, and est. forward 3-year earnings CAGR of -12%. We remain negative, as we see sharply lower new orders this year (forecast US$500m), given weaker industry fundamentals. Key risk: Higher oil prices and new orders.
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