• Bracing for more to come
• Considering the types of pre-emptive actions
• Pros and cons for merger

May not be the worst yet for companies

From a high of US$115/bbl in Jun 2014, Brent crude has fallen by about 70% to about US$33/bbl now, and chances are it may stay low for longer. It also remains to be seen if oil prices have bottomed, and even if so, oil companies would want to see some sustainability before budgeting for new projects.

Given the highly oversupplied rig market, things could get worse for Keppel Corp (KEP) and Sembcorp Marine (SMM) due to 1) potential provisions in jack-up rig orders in their order books, 2) potential provisions from Brazil, and 3) likely minimal new rig order flows for at least this year and next.

Considering the pre-emptive actions to take

It is hence not surprising that there are media reports saying that Temasek is discussing options for KEP and Sembcorp Industries (SCI), in which it has stakes of 21% and 49.5%, respectively. Given how KEP and SMM are global champions in their fields – and indeed Singapore wants to nurture globally competitive companies – we expect Temasek to lend its support to either companies should there be a need for more funds.

We explore the various scenarios that may happen, as well as the likelihood of each. In our view, KEP and SCI are likely to divest their non-core assets or investments that have netted a good return, before cutting their dividends further, and before considering the possibility of raising capital.

Merger talk may grow as downturn bites

In the longer term, should oil prices stay low longer than expected, a merger of KEP’s O&M division and SMM is not inconceivable, even though there are arguments against it and could be a difficult process. Sometimes things happen not by choice, and we consider the pros and cons for such a development.

Maintain HOLD and S$4.38 fair value estimate on KEP. For SMM, we have lowered our fair value to S$1.17 while maintaining SELL. Though this leads to a lower fair value for SCI to S$3.42, we maintain our BUY rating as the utilities portion remains undervalued.

Source: OCBC Research - 29 Jan 2016