Project cancelled, but still an Add
- We estimate FY24F EBIT impact of Equinor and BP’s cancelled 1,260MW offshore wind farm substation Empire Wind 2 (EW2) at S$20m-30m in total.
- Empire Wind 1 (810MW), the other offshore wind farm substation that was awarded together with EW 2, escaped the axe, with work started in 4Q23.
- We anticipate negative knee-jerk share price reaction, although the cancelled contract of S$250m-300m only forms 1.5% of its S$18.3bn orderbook.
- We keep our Add call and TP of S$0.19.
Macro factors caused cancellation
? Equinor and BP announced an agreement with the New York State Energy Research and Development Authority (NYSERDA) to terminate the Offshore Wind Renewable Energy Certificate (OREC) Agreement for EW2, an offshore wind farm substation in the US with potential generative capacity of 1,260MW. The key reason cited for cancellation was significant macroeconomic conditions, which we believe to be higher inflation, increased interest costs and supply chain impact, as a result of Covid-19-related disruptions and the Russia-Ukraine war. STM was affected accordingly and announced that its contract to build EW2 (contract value of more than S$250m) is being cancelled.
? Seatrium (STM) was awarded two offshore windfarm substation platforms (Empire Wind 1 and Empire Wind 2) by Equinor and BP in May 23. In Oct 23, we published a report on the decision by New York Public Service Commission (PSC) to reject an appeal to adjust prices in its power purchase agreements to incorporate inflation and other supply chain factors for 4 proposed offshore wind projects, including EW1 and 2. However, we believe Equinor/BP did not fully factor in the potential impact of a cancellation at that time.
? Construction work on the EW2 was expected to commence only in Jun 24, with minimal engineering work performed to date. STM said that it will avail construction capacity set aside for this project to other projects in the pipeline. The contract is structured on progressive payment milestones and payment for the work performed to date has been received, resulting in neutral project cashflow.
? We estimate EW2’s cancellation to reduce our FY24-26F EBIT by S$20m-30m in total, or c.S$7m-8m p.a. assuming high-single-digit EBIT margin of 7-8%.
Empire Wind 1 safe
? We believe 10-15% of EW1 has been completed as work started in 4Q23. The project is now due for delivery in 2026F.
? We understand from STM that construction of other offshore substations include Orsted’s Greater Changhua 2b and 4 offshore wind farms in Taiwan (clinched by Keppel Offshore and Marine in Jan 2023), which struck steel in Aug 2023. The project is due for delivery in 2025F.
1.5% impact on order book
? We estimate the cancelled contract forms about 1.5% of STM’s S$18.3bn order book. Although it is not big, we think any cancellation will negatively impact the share price.
? We would look to buy on share price weakness as we still project c.S$7bn of new order wins for 2024F, with high likelihood of awards from Petrobras and TenneT.
? Investor communication of post-merger cost savings between Sembcorp Marine and Keppel Offshore Marine could be a key catalyst. Other catalysts include securing one or two orders for jack-up rigs from national oil companies (NOC) as well as turning profitable by FY24F. Downside risks: order cancellations impacting revenue recognition, and project cost overruns impacting profitability.
? Reiterate Add as STM is the only offshore and marine proxy in ASEAN and it has a sizeable c.S$18bn order book with a path towards profitability as loss -making legacy projects are gradually completed by 1H24F. We retain our TP of S$0.19, still based on 1.5x CY24F P/BV, its 7-year average valuation.
? We understand from STM that its other offshore substation construction projects include Orsted’s Greater Changhua 2b and 4 offshore wind farms in Taiwan (clinched by Keppel Offshore and Marine in Jan 2023), which struck steel in Aug 2023. The project is due for delivery in 2025F. See offshore projects on page 2.
