Petrobras Oil Discovery Makes STX OSV 30% Undervalued: Real M&A

Petrobras Oil Discovery Makes STX OSV 30% Undervalued
Petroleo Brasileiro SA plans to spend $225 billion to help tap a possible 50 billion barrels of oil under the Atlantic Ocean. Photographer: Rich Press/Bloomberg

STX OSV Holdings Ltd., the world’s biggest maker of oil-rig support vessels, may attract a takeover premium of more than 30 percent as buyers look to profit from the Western Hemisphere’s largest oil discovery in three decades.

South Korea’s STX Group is seeking to sell its 51 percent stake in STX OSV as the Singapore-listed builder of anchor handlers and supply ships trades at 3.5 times earnings before interest, taxes, depreciation, and amortization, according to data compiled by Bloomberg. That’s cheaper than 97 percent of marine transportation services companies with market capitalizations of more than $1 billion, the data show.

STX OSV is building a second shipyard in Brazil, where Petroleo Brasileiro SA plans to spend $225 billion to help tap a possible 50 billion barrels of oil under the Atlantic Ocean. That may make STX OSV more attractive to Keppel Corp. and Sembcorp Marine Ltd., the largest oil-rig builders, according to Shinyoung Securities Co. With Singapore’s takeover guidelines requiring a buyer of a 30 percent stake to bid for the rest of the company, STX OSV may get an offer valued at $1.86 billion, 36 percent more than yesterday’s level, Citigroup Inc. said.

“Having not just one but two yards in Brazil is what makes STX OSV all the more attractive because Brazil requires the vessels and rigs it uses to be built in the country,” said Um Kyung A, an analyst at Shinyoung Securities in Seoul. “There’s a very high barrier to getting into the OSV market, so buying STX OSV will immediately resolve that problem.”

Breaking Ice

Spokesmen for STX Group and STX OSV declined to comment on the sales process in e-mailed messages. STX Group, which is selling its stake to repay debt, acquired Alesund, Norway-based STX OSV through the takeover of Aker Yards ASA in 2009 and completed an initial public offering of the company’s shares in Singapore in November 2010.

STX OSV surged as much as 9.6 percent in Singapore today to S$1.595, the highest level since its IPO. The shares closed up 5.8 percent at S$1.54.

The company is the world’s largest builder by capacity of vessels that carry supplies to floating platforms, manage rig anchors and break ice. STX OSV has nine shipyards -- five in Norway, two in Romania and one each in Brazil and Vietnam.

With oil trading at about $100 a barrel in New York and existing resources depleting, deep-water oil explorers are projected to spend a record $232 billion on new equipment in the next five years, according to Canterbury, England-based researcher Douglas-Westwood.

‘Harsher Environments’

“Increasingly both national oil companies and independent oil companies will have to move offshore and move to harsher environments,” said Steve Robertson, director at Douglas-Westwood. “When you start looking at these large offshore vessel companies, the big competitors are going to be interested as well as some private equity firms.”

The largest increase in capital expenditure forecast by Douglas-Westwood will come from Latin America, led by Rio de Janeiro-based Petroleo Brasileiro. Petrobras, as the Brazilian state oil company is known, is spending more than any major oil company to develop the largest crude discovery in the Americas since Mexico’s Cantarell field in 1976.

STX OSV has “first-mover advantage” in Brazil with 45 percent of the deep-water market, according to Citigroup. The company’s new shipyard in the country’s northeast is set to begin building ships in 2013.

Atlantic Ocean’s Floor

Petrobras will need equipment including 568 ships and 95 floating production vessels as it seeks to drill wells that lie as much as four miles below the Atlantic Ocean’s floor, the company’s former Chief Executive Officer Jose Sergio Gabrielli said in November. Petrobras requires ships used to develop fields off Brazil’s coast to be built in the country.

While Keppel and Sembcorp already have facilities in Brazil, STX OSV may also appeal to Korean shipbuilders who, with no presence in the country, are looking to diversify out of the market for large ships that haul commodities and consumer goods, according to Kay Lim, an analyst at DNB Bank ASA in Singapore.

“It is not easy to expand capacity in Brazil as there are restrictions on the amount of land you can get and in acquiring the permit,” Keppel Chief Executive Officer Choo Chiau Beng said last month. The Singapore-based company is looking for opportunities to increase the capacity of its yard in Brazil to tap orders in the South American nation, Choo said.

Deep-water rigs require more support vessels than those used in shallow-waters. A semi-submersible rig, used in deep water and held by anchors weighing more than 10 metric tons, needs as many as eight support vessels, according to DNB’s Lim.

‘Pent-Up Demand’

“We may see pent-up demand in the second half,” said Lim, referring to OSV orders. “If you look at oil discoveries last year, there have been significant finds in the North Sea and in Brazil they are still in their early cycle.”

STX OSV received orders worth 11.12 billion kroner ($1.94 billion) for 28 vessels last year, compared with 12.6 billion kroner the year before, the company said today. More than half of the new orders signed in the fourth quarter of 2011 were contracts with Petrobras Transporte SA, the state oil company’s transportation unit known as Transpetro.

Even after shares of STX OSV rallied 33 percent this year, the company is valued at 3.5 times Ebitda, according to data compiled by Bloomberg that includes net debt. That’s cheaper than 36 of 37 other marine transportation services companies with a market capitalization over $1 billion.

STX OSV may still be worth at least S$2 a share in a takeover, 37 percent more than yesterday’s close, according to Shinyoung’s Um. “The stock hasn’t fully reflected the company’s potential in the offshore support vessel industry,” she said.

Relative Value

A “plausible, best-case scenario,” is for another shipyard to pay as much as S$1.98 a share for full control of STX OSV, Si Xian Goh, a Singapore-based analyst at Citigroup, wrote in an e-mailed reply to questions. That’s 20 percent higher than his target price of S$1.65, and would value the company at 36 percent more than its market capitalization of S$1.72 billion ($1.37 billion) yesterday.

Keppel, backed by Temasek Holdings Pte, Singapore’s state investment fund, said last month the offshore market is “hot” after booking record orders in 2011 and posting fourth-quarter profit that beat analysts’ estimates.

Singapore-based Sembcorp Marine, created in 1963, last week won a $793 million contract to build a drill ship for Sete Brasil Participacoes SA to develop oil and gas fields discovered around the coast of Brazil.

‘Various Investments’

On Jan. 18, after STX Group disclosed its plans to sell STX OSV, both Keppel and Sembcorp said they were “currently” not making a bid for the stake. In e-mailed responses, Keppel’s Singapore-based spokeswoman Wong Chai Yueh repeated that statement, while Sembcorp Marine’s Judy Han referred to it.

“The company reiterates that, in the course of its business, it will explore various investments and acquisitions proposals,” according to Keppel’s Wong.

“The company will make the necessary announcements when appropriate,” wrote Sembcorp’s Han.

STX Group may decide to sell only a portion of its stake and avoid triggering an offer for the entire company, Chia Jiunyang, a Singapore-based analyst at OCBC Investment Research, wrote in a note on Feb. 6, referring to Singapore’s guidelines on large stake purchases in public companies.

“The cash requirement of such a transaction may be too prohibitive for some interested buyers,” the analyst said.

Still, buyers may be lured by the opportunity to take full control and extract cost savings from a shipyard that also has cash reserves, according to DNB Bank’s Lim. STX OSV ended September with net cash of $324 million, the third-highest level among rival marine transportation services companies worldwide, according to data compiled by Bloomberg.

“The 51 percent will be the key draw,” Lim said. “It will give them control.”

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