Cosco - Winning Petrobras’ contracts too?

Cosco clinched Petrobras’ FPSO hull conversion contract – an exception or the rule? Last Friday, Upstream reported that Cosco Corporation (Cosco) through Cosco Shipyard Group had secured a contract from Modec to deliver the hull and marine system of a FPSO for work at one of Petrobras’ oil fields. According to Upstream, Modec is the FPSO provider for Petrobras’ Tupi early production scheme. The contract amount was not disclosed in the article, though we note that Cosco had previously secured a similar contract valued at US$35m from Modec to carry out hull and marine repair and conversion work of an oil carrier to a FPSO in Apr 07.

Possible reasons for Cosco’s win. We think possible reasons for Cosco’s winning edge over the Singapore yards are 1. Competitive pricing, 2. Yard availability, 3. Cosco’s track record for hull conversion. Upstream noted that this FPSO is expected to be completed by late 2010, which implies that construction work would have to begin soon. The cancellations of 4 bulk carrier orders and deferment of 26 others would have freed up some yard space for Cosco to undertake offshore projects.

Background of Modec. Based on our checks on Modec’s website, Modec specializes in chartering floating production systems and has a close working relationship with Petrobras. In Aug 08, Modec announced that it had signed a letter of intent for the supply and charter of a FPSO vessel on the giant Tupi Area in the Santos Basin. This FPSO marks the 6 vessel that Modec would operate in Brazil. Furthermore, we note that Modec has identified other contract work opportunities for Petrobras, including a Floating Storage Regasification Unit, a Tension Leg Platform and FPSO for Petrobras’ Papa Terra oil field, in its website. We think any contract win would put Cosco in good standing to explore further working opportunities.

News could bring some upside relief. As Cosco faces a series of bad news, beginning with cancellation of semi-submersible rig hull from Red Flag AS, followed by MPF Corp’s bankruptcy and Sevan’s financing uncertainty, we think this news could bring upside relief to Cosco’s share price. However, we surmise Cosco’s yard execution and credit management still need to improve further before Cosco deserves any re-rating. Hence, we maintain our target price of S$0.740 based on 1x FY10 P/B. Maintain SELL.

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