By Low Pei Han
Fri, 6 Feb 2009, 09:01:25 SGT

Swiber Holdings (Swiber) is a service provider in the offshore oil and gas industry, offering offshore EPCIC, marine support and drilling services across the Asia Pacific and the Middle East. With the drastic fall in oil prices, Swiber is unlikely to be spared by cut-backs on E&P expenditures from oil companies, but it should be kept busy for this year with its strong order book of US$607m (last announced 30 Sep 08). Swiber is still bidding for US$4.2b worth of contracts for execution over the next five years and we account a 15% (historically ~20%) win rate, translating to US$630m worth of possible contracts. We are mindful that contract flow might be slow in 1H09 due to the cautious outlook on oil but any wins will be a positive share price catalyst. The stock has fallen more than 85% since Jan 08 and we see limited downside risk. Swiber is currently trading at its historical low valuation of ~2x FY09F earnings. We initiate coverage on Swiber with a BUY recommendation and S$0.66 fair value estimate.

Positioning itself as a niche offshore EPCIC provider. Swiber Holdings (Swiber) is a service provider in the offshore O&G industry, offering offshore EPCIC, marine support and drilling services. Starting out as a vessel charterer in 1996, the group has expanded into higher value-added services such as offshore EPCIC work and shipbuilding and repair. In 3Q08, the group achieved a 186.5% YoY rise in revenue to S$130.1m but incurred a 7.4% fall in net profit to S$18.2m, mainly due to higher administrative expenses & finance costs and lower other operating income.

Support from orderbook before the upturn. With the drastic fall in oil prices, Swiber is unlikely to be spared by cut-backs on E&P expenditures from oil companies. However, it should be kept busy for this year with its strong order book of US$607m (as of 30 Sep 08). Order cancellations are less likely compared to businesses such as rigbuilding since Swiber focuses on field development, the last leg before oil production. With low oil prices and a deteriorating industry outlook, we doubt the sector will outperform in the short term, but signs of an upturn should be exciting for Swiber, since fundamentals for the O&G industry are strong in the long run.

Growth opportunities still available. Swiber has deferred plans for deepwater drilling with the postponement of its first deepwater drilling unit, the Equatorial Driller. No material cost has been incurred so far, and falling material prices are expected to benefit the group in future. Despite the setback in deepwater ambitions (a blessing in disguise given current credit conditions), Swiber is aiming to grow its operations in India and the Middle East. The latter and in particular Saudi Arabia, has a lower cost of production as the offshore fields are mainly located in shallow waters.

Initiate with BUY. We initiate coverage on Swiber with a BUY recommendation with a fair value estimate of S$0.66 pegged at 3x FY09F earnings. We are pegging Swiber lower than its comparables’ current trading FY09F PER of 5x in view of its higher debt levels. Swiber is still bidding for US$4.2b worth of contracts for execution over the next five years and we account a 15% (historically ~20%) win rate, translating to US$630m worth of possible contracts. We are mindful that contract flow might be slow in 1H09 due to the cautious outlook on oil but any wins will be a positive share price catalyst. Swiber is currently trading at its historical low valuation of ~2x FY09F earnings.