Excerpts from UOBKayHian report
Seatrium Limited (SGX: 5E2)
- Seatrium business activity did not flag in 4Q24 with a notable contract win for a floating production unit for the Gulf of Mexico as well as the delivery of a fifth jack-up rig to Borr Drilling.
- A tie-up with an Indian shipyard presents interesting growth opportunities for the company in the medium to longer term. Key near-term share price catalysts are the conclusion of the MAS/CAD investigation, and the completion of two low-margin contracts in the US
Maintain BUY. Target price: S$2.80.
An offshore production platform win
In late-Dec 24, Seatrium (STM) announced that it had successfully converted a Letter of Intent to a firm contract for the engineering, procurement, construction and commissioning (EPCC) for BP’s Kaskida project in the Gulf of Mexico (GoM) which we estimate to be worth S$500m-600m.
As at end-3Q24, Seatrium net orderbook stood at S$24.4b excluding this contract, with deliveries out to 2031.
Strong contender for two more follow-on projects
While this project win was largely expected, we highlight that it is the first of BP’s three large deepwater discoveries in the GoM, the others being Tiber and Gila. In its 3Q24 results presentation, BP stated that Tiber will progress to final investment decision in 2025 and thus we should expect a contract announcement for its production platform 6-9 months thereafter.
In total, the three fields contain an estimated 9b bbls of recoverable reserves and are thus strategically and economically important to BP. In our view, the Kaskida EPCC contract puts STM in a very strong position to clinch the Tiber and Gila production units as both proceed towards final investment decision in the next few years.
A single yard winning all the production assets is not unprecedented as we point to STM winning Shell’s trio of deepwater production assets in the GoM, namely Whale, Vito and Sparta. Importantly, the building of a series of such assets will enable STM to capture higher profit margins given economies of scale.
Onerous contracts should be completed by end-24
In our view, one of the key overhangs on STM’s share price at the moment is its legacy contracts which have been a drag on its gross profit margins. We believe that these projects were completed by end-24 and in line with management’s projections.
Whether its US yards are closed down remains to be seen given that the new Trump administration may look favourably on companies with US assets
Successful delivery of fifth jack-up rig to Borr Drilling
In mid-Nov 24, STM announced that it had delivered its fifth newbuild jack-up rig “Var” to Borr Drilling. Importantly, this was nearly one year ahead of schedule and was executed within budget and bodes well for the company’s sequential EBITDA trend in 2H24 since completion of projects will see final payments paid to STM.
“Var” is a KFELS Super B Class 400-foot jack-up rig and comes on the heels of the fourth jack-up “Vali” that was delivered in Aug 24. In total, we estimate that STM will receive at least S$400m-420m in final payments for both jack-up rigs.
A small step into the busy Indian market
In late-Nov 24, STM announced that it had signed an MOU with Cochin Shipyard of Kerala, India, to jointly design and supply critical equipment for jack-up rigs for the Indian market with Mobile Offshore Drilling Units specifically mentioned.
Cochin Shipyard is an Indian Government enterprise with a market capitalisation of INR345b (US$4.1b).
Valuation/Recommendation
We maintain our BUY recommendation with an unchanged P/B-based target price of S$2.80. Our target P/B multiple of 1.4x is 1SD above the company’s five-year average and applied to its 2025 book value of S$2.04.
In our view, this P/B multiple appears reasonable considering the company’s strong competitive position globally as many of its peers have shuttered over the past decade.
In the near term, the key re-rating catalyst is the completion of the investigation by the MAS/CAD.
You can find the full report here and the company website here.
