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Singapore rig-builders seen riding oil rally

SINGAPORE: Singapore’s rig-builders, whose share gains have dwarfed the rise in the broader market so far this year, could rally further as high oil prices revive exploration and production, analysts said.

Marine engineering shares — Keppel Corp., SembCorp Marine Ltd. and KS Tech Ltd. — are hovering near lifetime highs on hopes that near-record oil prices will fuel an expansion of the offshore oil industry. But analysts cautioned that some of the firms’ shares could drop over the short-term as investors sell to lock in recent gains. The outlook could also be adversely affected if oil prices fall, they said.

“We are expecting a healthy correction in the next one month, but definitely in 12 months’ time it will trade above current levels,” Winson Fong, chief investment officer at SG Asset Management, said of Keppel, the world’s leading builder of shallow-water oil rigs. SG Asset Management manages $2.3 billion of funds in Singapore.

Keppel’s share price, which touched a lifetime-high of S$11.40 last Monday, has leapt 20.9 percent so far this year, more than five times the broader market’s near four percent gain.

Its share price jumped as much as 3.9 percent to S$10.8 on Monday after it said its Keppel FELS Ltd. unit had won a $128.8 million contract to build a jack-up, or shallow water, rig for Seatankers Management Co. Ltd.

Shares in rival SembCorp Marine leapt as much as 45.9 percent this year to a record high of S$1.97 last week. Small-capitalised KS Tech, which supplies equipment and refurbishing rigs to the oil and gas industry, has also seen its share price race ahead by as much as 148 percent this year to a record S$1.87 on March 16.

Just the ‘beginning’: Analysts expect high oil prices and ageing rigs — 90 percent of the world’s shallow-water rig fleet is estimated to be more than 20 years old — to spur business for rig-builders.

“The oil cycle looks a lot stronger than anyone envisaged. This looks like a sustainable boom in the oil industry,” said an analyst with a U.S. brokerage.

“We have only seen the first wave of spending for jack-up rigs. This is only the beginning,” said UOB Kay Hian analyst Nancy Wei, who has a 12-month price target of S$13 for Keppel, a 14 percent premium to the share’s life-time high.

Wei’s target price of S$2.35 for SembCorp Marine is a 19 percent premium to its record high.

Fund managers said that although shares in Keppel and SembCorp Marine have grown pricier, they remain attractive compared with global peers.

Houston-based offshore driller Rowan Cos. Inc., which owns rig-builder LeTourneau, is trading at 22.5 times projected 2005 earnings, according to Reuters data.

Keppel, by comparison, trades at 15.4 times projected 2005 earnings, SembCorp Marine trades at 20.9 times while KS Tech, which has a market capitalisation of only US$121.7 million, trades at 18.1 times its forecast 2005 earnings.

“They are no longer super cheap,” said Teng Ngiek Lian, chief investment officer with Target Asset Management, who manages US$600 million worth of funds in Singapore. But Teng said the growth outlook for SembCorp Marine and Keppel justified the price target upgrades.

“They are very stable and have high visibility,” he said, referring to SembCorp Marine’s and Keppel’s earnings growth outlook. “As long as oil prices are above $40 or $45, activities for oil exploration will remain very strong.” Keppel has announced new contracts worth $911.8 million in the past two weeks while SembCorp Marine has clinched $774.3 million worth of contracts this year. —Reuters

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