Half a year ago, Swiber has been a much touted stock as its order books swelled to US$1b which is an all time record. Nevertheless, its share price failed to impress with a 2.0% year to date (“YTD”) loss vis-à-vis STI’s 8.5% gain. Notwithstanding the underperformance, Swiber looks interesting due to the reasons below.

According to the International Energy Agency, it postulated that demand for oil will rise 260,000 barrels more than its previous forecast to 88.8 million barrels a day next year. Furthermore, based on Infield Systems’ latest offshore fixed platform data, there is likely to be a ramp-up in the number of shallow-water fixed platform installations in 2011.

Swiber’s order books as of Nov 10 amounted to US$800m. These orders increased the visibility of Swiber’s earnings in the next two years as the bulk of their contributions will be recognized in the next two years.

According to UOB Kay Hian, Swiber is bidding or is pending for submission for a number of contracts as depicted in Table 1. With a historical success rate of 10-20% (which should gradually improve as their relationships deepen with their customers, coupled with ownership of more offshore vessels and construction vessels than 2005-2008), Swiber should see some healthy contracts flow in the next few years.

According to Upstream online, Swiber submitted the lowest bid to India’s Oil and Natural Gas Corporation (“ONGC”) for the design and engineering, procurement, installation and construction contract for subsea pipelines with a bid of US$124.8m, 5% lower than that of the nearest competitor Punj Lloyd which quoted about US$131.3 million. Nevertheless, as local contractors would have a 10% price preference vis-à-vis other non-Indian competitors, Swiber may not win the contract. However, Swiber reportedly has contacted ONGC to be declared as the winner. This is still pending decision by ONGC which should be announced in the next 1-3 months.

Secondly, Saudi Aramco’s Wasit project by is expected to close submission of bids by 4 January 2011 (after extending an earlier delayed deadline of 7 Dec). The value of the offshore work for the Wasit project is likely to be around US$4b. Awards are likely to be announced by April or May.

Thirdly, the award season in Southeast Asia is typically around December to March, thus there is likely to be some positive news flow in the next quarter (possibly from the aforementioned projects in Table 1).

With reference to Table 2, Swiber’s 2011F PE is slightly lower than Ezra and Ezion but it has a higher historical ROE than them. It is noteworthy that the sizeable contracts clinched by Swiber in the early part of 2010 would commence meaningful contribution in 4Q2010 and beyond. In addition, during its peak, Swiber trades at a PE of around 27x in 2007 vis-à-vis the 7.9x 2011F PE (Note: Swiber’s order books are at least 2x higher), thus there is likely room for re-rating if Swiber delivers on its revenue and earnings front, coupled with announcements of sizeable contract wins.

Short Name	Cur	Last Px	Analyst consensus TP	Chg from consensus TP	1 Yr high	1 Yr low	Adj mkt cap (S$m)	FY11F PE	ROE (%)	FY10F div yield	YTD Return
Swiber Holdings	SGD	0.995	1.36	36.8	1.28	0.90	505.8	7.9	13.8	0.0	-2.0%
Ezra Holdings Lt	SGD	1.750	2.09	19.2	2.49	1.50	1392.0	9.7	13.5	1.0	-18.9%
Asl Marine Hldgs	SGD	0.725	0.74	2.0	0.76	0.54	306.0	8.1	12.3	3.1	8.4%
Ch Offshore Ltd	SGD	0.490	0.65	32.7	0.74	0.46	345.5	7.0	18.5	2.9	-25.5%
Ezion Holdings L	SGD	0.690	0.95	38.3	0.86	0.55	492.6	8.4	11.5	0.1	-9.0%
Mermaid Maritime	SGD	0.415	0.55	32.5	0.94	0.40	325.7	34.0	-4.0	0.0	-51.5%
Kreuz Holdings	SGD	0.425	0.50	17.6	0.52	0.27	215.5	10.9	NA	NA	NA
Average excluding Swiber and Mermaid								8.8	13.9	1.8

Source: Bloomberg as of 24 Dec 10

In my opinion, the lackluster performance in the share price may be mainly attributable to two factors viz.

a) Swiber has released three quarterly results since the start of 2010 and none is inspiring, despite its breathtaking order books. Nevertheless, according to UOB Kayhian research, Swiber’s three major contracts secured from India’s ONGC (Swiber’s share of the contracts won is US$273m) would have a meaningful contribution starting in 4QFY10.

b) Despite being upbeat on the prospects of new contracts and bidding in numerous contracts, Swiber has not announced any new contracts since 20 May 2010. Analysts have also expected major contracts to be announced by end 2010. Till now, it has not materialized. Nevertheless, I feel this may just be due to timing issues where sizeable contracts are likely to be announced in the next 1-3 months.

Yes, the US$100m convertible bond (“CB”) issued on 16 Oct 09 is a wild card because if Swiber’s share price continues its gradual descent, the potential number of shares to be convertible would increase at every reset date. This is because the conversion price of this CB is reset semi annually (October and April). In fact, the conversion price has been adjusted downwards from $1.14 to $1.08 on 16 Oct 10. At $1.08, assuming that all the CB are converted into equity at the fixed exchange rate of US$1 = S$1.44, 133,333,333 shares would be issued on conversion, representing 26.38% of Swiber’s existing share capital of 505.355m shares.

Furthermore, with this issuance of CB, it is likely to cap any upside in the near term as CB holders are likely to convert into shares if Swiber’s share price exceeds $1.08 for a period of time (as the conversion price on the CB is likely to be adjusted upwards on the next reset date.) Nevertheless, given time, there will be likely to be less pressure on Swiber’s share price once all the CB holders have converted into equity and those CB holders who want to sell Swiber’s shares have already sold.

P.S: Other risks such as sharp slowdown in economy or a sharp drop in oil price have been discussed in my previous write-up to clients.

Conclusion

Given the still positive macro outlook on the oil and gas industry, coupled with impending contract awards in the 1-3 months and cheap valuations against its earnings potential, Swiber is likely to be re-rated in the months ahead. Furthermore, if Swiber can deliver strong 4QFY10 results from the gradual recognition of its order books, investors would have more confidence in chasing the stock higher than the current price now.

This writeup is an amended version which was sent out to my clients yesterday.

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