Sembcorp Marine - Sale of Petrorig-1 to Diamond Offshore

SMM confirms sale to Diamond Offshore Services Company; no price-tag announced: In a press release published after market hours, SMM confirmed the sale of the semi-submersible (Petrorig-1) to the highest bid, which was made by Diamond Offshore Services Company, a related company of Diamond Offshore Drilling. However, no details have been provided on the agreed-upon price, with sale expected to be completed by end-June 2009. As we have highlighted earlier, we expected limited risk with regards to SMM’s outstanding proceeds on Petrorig-1.

Cash-flow positive event although minimal incremental EPS impact: Given that SMM has outstanding of approximately US$220-230 million versus anticipated sale price of US$400-450 million, we'd expect SMM to easily recover its entire costs outstanding, profit margin on the asset construction as well as incidental costs incurred due to the bidding process. While this would be cash flow positive, we would expect to see minimal incremental impact on earnings as the company would have followed the percentage of completion, and we believe close to 90% of related project would have been booked as earnings till date.

Can we expect the same outcome for Petrorig-2 and Petrorig-3 in case PetroMENA is unable to pay outstanding proceeds? : With the sale of Petrorig-1 now largely complete, we believe the concerns relating to Petrorig 2 and Petrorig-3 should largely abate, even if PetroMENA is unable to meet the outstanding payments on both these rigs. While the Petrobras contract associated with Petrorig-1 may be renegotiated (as we understand the Petrobras rig contract at day rate of US$390k does not stand with the sale of the asset), we believe the current sale provides confidence of DO maintaining or possibly increasing day rate.

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