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SembMarine: Cleaning Up After Katrina


In the wake of hurricanes Katrina and Rita, companies in the Gulf of Mexico region that make house trailers and building materials are doing a banner business. But one of the biggest beneficiaries is a company that few in the Gulf have heard of: SembCorp Marine Ltd. of Singapore. SembMarine, as it is known, builds and repairs offshore oil and gas rigs -- the giant platforms often situated miles out to sea that suck fuel from below the seabed. Eighteen of those rigs were destroyed or seriously damaged in the storms, and it will cost from $100 million to $600 million each to replace them. Much of that money will flow into the coffers of SembMarine and another Singapore rig builder, Keppel Corp., which together control 75% of the global market for oil and gas rigs. Temasek, the Singapore state holding company, has controlling stakes in Keppel and SembMarine.

SembMarine is particularly well positioned to profit from the rebuilding in the Gulf. Last summer it bought Sabine Shipyard, a Texas repair facility that SembMarine is now converting into its U.S. base. "Sabine is probably going to be one of the biggest single beneficiaries of Katrina," says Janice Chua, marine industry analyst for brokerage CIMB-GKGoh in Singapore.

Even before the storms hit, the offshore oil rig business was booming. High demand has the petroleum industry scrambling for new resources, and many offshore sites remain unexploited. SembMarine's order book is up from $500 million in 2002 to $3.8 billion, enough to keep it busy until 2010. Smith Barney Citigroup () projects SembMarine will post a net profit of $82.2 million this year on revenues of $1.2 billion, and $132.2 million next year on revenues of $1.9 billion. Morgan Stanley () estimates that at least $15 billion in new rigs will be built by SembMarine, Keppel, and others in the next seven years.

The Gulf of Mexico is the world's largest offshore oil and gas drilling theater; about 25% of the estimated 2,900 rigs worldwide are there. Their average age is 25 years, so they would have needed replacing had Katrina never happened. "There is a shortage of rigs, and there is not enough new capacity coming on," says Tor Olav Troim, a director of Bermuda-based SeaDrill Ltd. SeaDrill, owned by Norwegian billionaire John Fredrikson, is one of several companies that contract with SembMarine and others to build rigs, then lease them to oil majors such as Exxon Mobil Corp. () and BP PLC (). Leasing rates for the larger rigs run $300,000 to $400,000 a day, up 100% from a year ago.

SEMI-SUBMERSIBLE STRUGGLE

There are two main types of offshore rigs. The first is the jack-up rig, in which the drilling equipment sits on the seabed and is attached by long steel stanchions to a platform and worker housing that sit atop the water. These cost $100 million to $150 million to build, and can drill down 25,000 feet. Then there's the semi-submersible rig, in which the drilling platform floats on the water. Semi-submersibles, which can be towed from location to location, cost $300 million to $600 million, and drill down 35,000 feet or more.

The distinction is important for SembMarine. Singapore shipyards rule the jack-up rig market, but there is increasing competition in semi-submersibles. Two Korean shipyards got new semi-submersible orders in recent months from SeaDrill and Awilco, another Norwegian outfit. SeaDrill has placed more than $1 billion in orders with SembMarine this year, but another $1 billion with others. "We are a big customer of Keppel and SembMarine. But capacity is tight, so we will go to whoever can build the rigs for us," says SeaDrill's Troim.

How long will the boom last? The offshore rig industry is notoriously cyclical. Still, analysts don't expect demand to abate anytime soon, especially for the big semi-submersibles, which are increasingly needed as drilling moves into deeper waters where the bulk of offshore oil reserves now reside. Tang Kin Fei, CEO of SembMarine parent SembCorp Industries, says "we may not get the $3 billion jump" in orders the company has seen in the last three years. But as the massive cleanup continues in the Gulf, he's sure SembMarine has a secure future.

By Assif Shameen


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