Cosco Corporation Ltd: One more tender rig worth US$66m from Seadrill

Seadrill exercised option for a tender drilling rig. Cosco announced that Seadrill has exercised the option for one more tender drilling rig (T17) worth US$66m, to be delivered 1Q2013. T17 is similar to the two tender rigs Seadrill ordered from Cosco in Feb 2011 - T15 and T16 worth a total of US$130m.

This contract brings total new contract wins to US$1.35b or 54% of our assumed contract wins of US$2.5b. In the event Sevan's US$1.05b LOI for drilling rigs is exercised, this will lead to potential upside in our assumed order wins. The chance of Sevan's LOI being confirmed as contracts is high, pending the listing of Sevan Drilling by end April. With this order, Seadrill now accounts for 11% of Cosco's current offshore order book.

According to Upstream, there is one more outstanding option – T18 for a similar Tender drilling rig from Seadrill, the option expiring end April.

Another vote of confidence. Although the project appears small, getting repeat orders from an established rig operator - Seadrill is far more meaningful than just adding on to Cosco's project list. It reinforces our view that Cosco is gaining traction into offshore and taking a bigger share of global rigbuilding orders. While we do not overlook the potential risk as Cosco climbs the learning curve, the company has showcase a strong track record in offshore over the past two years, which proves their offshore capability. This is also in line with our argument that Cosco will be winning more contracts from non-Sevan customers and this will minimise customer concentration risk, pending more contract wins.

More to come. We reiterate our belief that Cosco's active enquiry received since 4Q10 will translate into firm orders in the months ahead and generate a strong wave of re-rating to Cosco's share price. Potential orders include FPSOs,semi-sub rigs, and wind turbine installation vessels totaling over US$2bn. This should overshadow the industry's concerns on steel cost, which is still hovering at manageable level; and RMB appreciation.

Maintain Buy with target price of S$3.16, based on blended FY11/12F PE and P/BV.

Source