Singapore’s troubled rig builders sitting in the eye of the storm

It’s not all doom and gloom at the moment, but all bets are off after 2015.

Local rig builders have already taken a hit from the unanticipated plunge in oil prices, but the worst is far from over for these troubled firms.

Analysts warn that while sufficient order backlogs will keep local rig builders afloat this year, the continued volatility in oil prices and a looming supply glut will cloud the sector’s outlook after 2015.

According to Barclays, recent developments show that rig builders Keppel Corp and Sembcorp Marine are at lesser risk of contract delays or cancellations from their South American clients, which should keep their earnings intact.

However, orders could decline significantly after 2015 on back of the slowing deepwater offshore markets and the big supply of uncontracted jackups expected to flood the market this year.

“2015 earnings should be secure, but slowdown in orders could harm future earnings: Indeed, a better outlook for orders coming from these two countries should ensure less risk to 2015 earnings, in our view. However, an extended period of low oil prices could negatively impact the order outlook for these companies,” stated Barclays.

A report by Nomura also stated that global jackup rig orders are expected to weaken significantly towards the end of 2015 on the risk of industry oversupply.

Nomura noted that there is a massive supply of uncontracted jack-up rigs scheduled for delivery in 2015, with only 7% of 67 scheduled deliveries contracted to date. 

“We expect the likely flooding of the resale market with Chinese-built jackup rigs (at possibly distressed prices) to delay the expected commencement of the supply-side rig replacement-driven orders to 2H16F. Indeed, even if crude oil prices are to recover as expected, we expect newbuild jackup rig orders to be subdued in 2015F,” stated Nomura.