Favourable FPSO bidding landscape
? We think tight global yard capacities have shrunk the number of bidders for the upcoming Petrobras FPSO P84/P85 tenders (c.US$3bn each).
? Having won 80% of the FPSO contracts awarded since 2021, STM has a good chance of winning the bid for at least one unit, in our view.
? We keep FY23F win target at S$7.6bn but raise FY24F order win to S$7bn (previously S$4bn), factoring the above. YTD order win stands at c.S$5.8bn.
? STM is releasing its 1H23F results on 28 Jul. We will watch out for revenue potential as a combined yard, especially in ship repair, together with KOM.
Market leader for Petrobras’ FPSOs
If Petrobras does not amend the bidding rule for the P84/P85 floating production storage offloading (FPSO) tenders, i.e. no single yard to be awarded both contracts, we expect Seatrium (STM) to win the bid for at least one of the units by early-2024F for a 2028 delivery. As a combined unit of STM, it has won four of the five (80% market share) FPSO contracts awarded by Petrobras since 2021 (Fig 1), with the last two units secured in 2022 at US$2.8bn-3.05bn each. With the P84/P85 floaters having similar oil production capacity of 225k bbl/d of oil and gas as P82/P83, we estimate their contract values to be worth more than US$3bn each.
Tight yard capacity keeping competitors away
We understand from channel checks that STM’s conventional competitors, i.e. Korean Hanwa Oceana and Hyundai Heavy Industries (HHI), are giving the full EPC tenders a miss, potentially due to their tight yard capacity and better margins from shipbuilding (c. 20% OPM for LNG carriers vs. our estimated low- to mid-teen OPMs for the FPSOs). Italian Saipem (which won the P79 contract in 2021) is also not tendering for the P84/P85contracts, according to Upstream news.
What to look out for in the upcoming results announcement
We estimate STM posting 1H23F revenue of c.S$2.4bn, EBITDA of S$120m, gross profit of c.S$48m and net loss of c.S$45m. We focus on the upside potential to our revenue forecasts as a combined yard, especially in ship repair, together with Keppel Offshore & Marine (KOM)’s capacity (previously undisclosed). We think STM’s disclosure of its order book and revenue breakdown by segment could be a catalyst. Note that KOM’s revenue for the two months ending Feb 23 was S$610m (1Q22: S$503m), indicating a strong recovery in yard utilisation. We believe there could also be provisions to be made for legacy projects. In FY22, KOM incurred cost overruns in its US yard due to shortage of manpower and supply chain disruptions. Keppel AmFELS is due to deliver a Wind Turbine Installation Vessel (WTIV) by end-2023F for Dominion Energy. Reiterate Add and TP of S$0.19, still based on 1.5x CY23F P/BV (average trading range from Jan 15 to May 23). Re-rating catalysts: settlement of Brazilian proceedings, stronger-than-expected order wins, newbuild rig orders. Downside risks: cost overrun in projects delaying turnaround in profits.
Sharing the pie with Chinese yards
According to Upstream news, other full engineering, procurement and construction (EPC) contenders for the Petrobras contracts are Chinese Offshore Oil Engineering Company (COOEC) and CIMC Raffles, while Cosco Shipping Heavy Industry has likely lined up with STM as a subcontractor for the two floaters’
hulls and living quarters.
STM’s global capacity and network of more than 700ha of land and focus on offshore structure (instead of shipbuilding), as well as track record in previous Petrobras FPSO contracts, could put the group ahead of its potential rivals in the bidding for the Petrobras FPSOs.
Upward revision to our order intake assumptions
We believe that among the c.S$3bn legacy contracts (clinched prior to 2022) in STM’s order book of more than S$20bn is a profitable P78 contract that is due for end-2024F delivery. As chances of winning a P84 or P85 are high, we pencil in a S$7bn win expectation (from S$4bn) for 2024F. YTD, STM has won orders worth about S$5.8bn.
In our recent conversations with STM, we also understand that the group has set a target of at least achieving gross margins in the mid-teens for projects clinched in 2023F. Accordingly, we raise our FY25F EPS forecast by 30%.
We have factored in EBTIDA margins of 5%/9%/11% for FY23F/24F/25F. Note that, on average, SMM and KOM had achieved EBTIDA margins of about 7% in FY15-19.
Addressing other investor FAQs on Siemens Gamesa
Any impact from recent Siemens Gamesa on STM Tennet projects? Although the recent issue of Siemens Gamesa is largely related to onshore wind, the company said, in its briefing to sell-side analysts, that its offshore production ramp-up has been difficult and is also under review, together with the onshore
wind turbine business. This could pose worries for investors on the offshore wind capex bidding momentum, as well as related margins.
Recall that in Mar 23, STM (previously Sembcorp Marine, SMM), together with its consortium partner GE Renewable Energy’s Grid Solutions (GE), secured a Framework Cooperation Agreement from TenneT TSO B.V to supply high voltage direct current (HVDC) electrical transmission systems for three mega offshore
windfarm projects in the Netherlands. The three windfarms have a combined capacity of 6GW. Each contract is worth 2bn euros (c.S$2.9bn). STM’s portion of the work comprise the design, build, installation and commissioning of the offshore platforms, which will host the GE converter systems and equipment. Located within each wind farm, the platforms will comprise a 25,500-tonne topside and a
9,500-tonne jacket foundation structure. We estimate STM’s share to be c.60% of the total contract, or c.S$5.3bn. Work is set to commence in 3Q24F, with delivery expected from 4Q29F and 2031F. For now, we do not see any immediate impact for the above projects and there have been no indications from TennetT on plans to review overall spending.