By Low Pei Han
Thu, 8 Jul 2010, 08:52:04 SGT

According to ODS Petrodata, 73 out of 123 mobile offshore drilling rigs are under contract in the Gulf of Mexico (GOM), but only 35 are actually working. We note that though fleet utilization is low at 59.3%, it is only slightly lower than 61.8% in early June and still higher than 49.1% a year ago. However, near-term drilling activity is likely to be limited by ongoing regulations in the GOM. Oil price is likely to remain in a narrow trading range in the short term, and though we maintain our OVERWEIGHT rating on the sector given its solid long term fundamentals, we remain cautious with regards to the oil price outlook in the near term. Keppel Corporation [BUY, FV: S$11.22] remains as our preferred sector pick given the high chance of it winning some of Petrobras’ orders, good track record and potential support from its other businesses. Swiber [BUY, FV: S$1.38], which is trading at 9x FY10 core earnings is also attractive given its huge order book in a relatively more buoyant industry segment.

Situation in the GOM. According to ODS Petrodata, 73 out of 123 mobile offshore drilling rigs are under contract in the Gulf of Mexico, but only 35 are actually working because of a confluence of factors: 1) the deepwater drilling moratorium, 2) inclement weather related to a hurricane, and 3) changes to permitting rules. However, we note that though fleet utilization is low at 59.3%, it is only slightly lower than 61.8% in early June and still higher than 49.1% a year ago when fewer rigs were under contract (Exhibit 1). Despite the higher on-year utilization rate, near-term drilling activity is likely to be limited by ongoing regulations in the GOM. As a result, more companies are seeking a way out of their rig contracts such as Devon Energy and Murphy Oil declaring force majeure on two of Diamond Offshore’s rigs .

Stable utilization levels worldwide. More rigs have been added to the worldwide drilling fleet in the past year (to about 761 today compared to 729 a year ago), but the fleet utilization rate remains stable at around 77.5% today. In Asia/Australia ex-India, the utilization level is also similar to last year’s figure of around 84.6%. Besides mobile drilling units, about 298 platform rigs are deployed worldwide, with 80.2% of them being contracted as at end Mar.

Cautious in the near term. Oil price is likely to remain in a narrow trading range in the short term, and though we maintain our OVERWEIGHT rating on the sector given its solid long term fundamentals, we remain cautious with regards to the oil price outlook in the near term (which affects related stocks to varying degrees) as concerns of a slowing global economic recovery weigh on oil demand. Though bargain hunting may emerge on dips, uncertainties related to the global economic recovery and the Eurozone crisis may continue to weigh on stocks. For now, economic indicators point to a moderation of China’s growth, rather than a hard landing that some fear, in our view. YTD, among the stocks in Exhibit 5, only Yangzijiang and the two rig builders outperformed the STI. Keppel Corporation [BUY, FV: S$11.22] remains as our preferred sector pick given the high chance of it winning some of Petrobras’ orders, good track record and potential support from its other businesses. Swiber [BUY, FV: S$1.38] which is trading at 9x FY10 core earnings also looks attractive given its huge orderbook in a relatively more buoyant industry segment.