• Order flows to slow
• Petrobras has its own problems
• Downgrade to HOLD

Working in a subdued oil price environment

Following the sell down on Sembcorp Marine (SMM) since early Sep, our rating upgrade to Buy in Oct proved too optimistic. Oil prices took a tumble in 2H14 this year, taking many on the street by surprise. At the earlier part of the year, oil price forecasts for 2015 were generally higher than US$100/bbl, and the US Energy Information Administration mentioned in as recent as its early Oct report that Brent crude oil prices may average $98/bbl in 4Q14 and $102/bbl in 2015. But with OPEC’s latest announcement to keep output unchanged, oil prices have fallen even further to its lowest in four years with Brent at $72/bbl and WTI at $68/bbl.

Order flows likely to slow

As oil prices settle lower, producers on the margin are impacted, reducing spending for projects that become uneconomic at the upper end of the cost curve. Lower capital expenditure is expected to be seen in oil sands projects, certain US shale oil projects and certain deepwater and Gulf of Mexico/North Sea projects. This should impact new order wins for oil and gas players, and Sembcorp Marine is unlikely to be spared as well.

Petrobras faces problems of its own

SMM has a net order book of S$12.6b with deliveries till 2019, and about half of this comprises drillships from Brazil. The widening corruption probe at Sete Brasil is threatening to impair its ability to finance its investments plans, and while existing contracts still seem to be going on, this could impact new project awards from Brazil. Any more negative news on this front could affect sentiment on Brazilrelated plays. On a more positive note, SMM may still see production-related work such as FPSOs and fixed platforms from other parts of the world.

Downgrade to HOLD

With oil prices likely to remain subdued and few visible positive re-rating catalysts in the near term, we lower our P/E for our SOTPbased fair value from 14x to 12x, as well as our 2015 new order win assumption for the group from S$4.5b to S$2.5b, resulting in a fair value estimate of S$3.24 (prev. S$4.18). Downgrade SMM to HOLD.

Source: OCBC Research - 1 Dec 2014