Rigbuilders' fall today
Keppel Corp (KEP) and Sembcorp Marine (SMM) are down about 6.4% and 7.2% respectively currently.
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10 August 2011
Rigbuilders' fall today
Keppel Corp (KEP) and Sembcorp Marine (SMM) are down about 6.4% and 7.2% respectively currently.
This is likely because of negative sentiment due to the drop in oil prices – WTI has fallen from US$100/bbl on 26 Jul 2011 to about US$82/bbl currently, though Brent is still above US$100/bbl. The downgrade in the US credit rating has added to concerns of a slowdown in the US economy, the world’s largest consumer, which may hurt demand for oil.
As mentioned in our sector report (14 Jul 2011), oil price volatility is expected to be increasingly prevalent, but if oil price remain above US$75/bbl, most capital expenditure in the oil and gas sector should be sustained. Given the negative sentiment in the market, it would not be surprising to see WTI crude fall below this level, but we would be more concerned if Brent were to breach this mark.
Brent crude (sourced from the North Sea) is currently regarded as a better indicator of world oil prices now, compared to the WTI (US benchmark). Rising supplies at Cushing, Oklahoma because of logistical problems (oil can't be transported as easily as before to the Gulf Coast for export) has meant that WTI is now priced at a discount to other grades of oil and is therefore less accurate as a barometer of the world oil price.
Should the downward trend in oil prices continue, new order flow for KEP and SMM may be weaker than earlier expected. Hence we are monitoring the trend in oil prices.
Still, KEP has met 88% of our full year new order estimate while SMM has met about 60%.
Meanwhile, with the fall in KEP’s and SMM’s share price, value is emerging. Maintain BUY on KEP and SMM with fair value estimate of S$12.92 and S$6.30 respectively.