Deepwater exploration remains viable
Drilling deeper into fundamentals
In light of headwinds experienced by some offshore oil exploration
contractors, we present our view of the offshore drilling and production
sector in this report. We look into exploration and production (E&P)
economics as well as consider the dynamics of the existing
infrastructure capacity. We also provide scenario analysis of order
cancellations for Keppel and SembCorp, and provide a financial score of
their top ten clients. In a separate report, BNP Paribas Head of Asia
Energy, Bradley Way, has prepared an in-depth study on the outlook for
China Oilfield Services.
Credit crisis not an oil crisis
Exploration and production fundamentals are intact. The cancellation of
drilling and delays in development, which we believe are occurring due
to declines in material prices, could set up a second oil cycle driven by
supply constraints. Nonetheless, deepwater drilling infrastructure is likely
to be insufficient. The tightness in supply for mid-depth and deepwater
rigs should remain for the next five years, but shallower water rigs are at
risk of being in oversupply in 2009.
The structural story is not over for offshore yards
Singapore offshore yards supplying rigs and production platforms will
continue to benefit from the need for more drilling rigs and consequently
for floating, production, storage and offloading (FPSO) platform
conversions. FPSOs will continue to be in high demand as new finds
move further offshore.
Look for opportunities to accumulate
Existing orders could be plagued by clients facing financing difficulties.
However, the financial impact to the yards may not be significant, given
the fundamentals. Our view is that risks are already priced in, and we
view any negative reactions to weakness in the E&P sector as
opportunities for accumulation. Our top pick is SembCorp Marine, which
provides a purer exposure to the offshore sector. It also has an order
book that is more resilient than appreciated.

Contents
Investment summary ..................................................................................................... 3
Exploration activity is still a necessity 3
Strong need for development infrastructure as well 6
Elephant hunting 7
Deeperwater rigs are still in demand 9
Supply of deepwater rigs probably insufficient till 2011 11
Big order books and strong balance sheets 12
Risk of order cancellations exists nonetheless 12
Survival signs – selected clients 13
EPS sensitivity to order cancellations 15
Put the risk of order cancellations in perspective 20
Opportunities to accumulate 20
Appendices.................................................................................................................. 21
1. Order win history 21
2. Peer valuations 26
Company updates ....................................................................................................... 27
SembCorp Marine 28
Keppel Corp 30