Sembcorp Marine Ltd: PetroMena defaults on final payment for first rig

Customer crumbles under financial pressure. Sembcorp Marine's (SMM) customer, PetroMena, has defaulted on the final payment of US$228m for its 6th-generation semi-sub PetroRig I. PetroMena, largely controlled by Larsen Oil & Gas, has been under pressure to obtain financing to pay for its large capex outlays that it placed when the economy was in its bull run and oil prices were rapidly rising. With the default, SMM now owns the rig and has announced that it will sell the rig in the open market. However, SMM is contractually only entitled to what is equitably theirs (ie. contract value of rig + misc), and not to the entire proceeds of the sale.

Confident of a buyer. We are confident that the rig will find a buyer because: 1) The rig is immediately available (has MOU for offer at US$450m) and possesses >10,000ft drilling capability. Typical semi-sub build times range from 2-3 years and have a plethora of risks like equipment delays etc. 2) Rig prices are still high - current 6th-gen deepwater semi-subs are still changing hands at ~US$650m (source: ODS-PetroData, Mar 09). Even if SMM sold the rig at a discount, we believe it would be able to cover costs and make a profit. 3) Petrorig I is non-speculative - operators who are keen on deepwater operations will be able to reap immediate benefits as the rig comes with a 5-year contract from Petrobras with day rates of US$395k/ day.

What about the other two rigs? SMM is still constructing Petrorig II (delivery: Sep 2009) and Petrorig III (delivery: Jan 2010). As payments for these two rigs are not in default, SMM is still obliged to continue building them and will endeavour to deliver on time to prevent any reason for cancellation. Payment defaults (like for Petrorig I) are effected when payments are not received two weeks after contract completion. There is an MOU between a buyer and PetroMena for the sale of Petrorig III at US$540m. The depressed prices offered for these brand new 6th-gen rigs are much lower than usual in view of the distressed situation that PetroMena is in (see exhibit 5).

No losses expected for SMM. When the rigs are finally sold, SMM will take the portion due to itself and remit the rest back to the bondholders of the rigs. As such, we do not expect changes to the original estimates that these rigs will bring to SMM. We are maintaining our HOLD rating and fair value of S$2.02.

Sponsored Links

Related Posts by Categories