Batten down the hatches: Shipbuilders’ woes escalate as rig glut intensifies

Dark days are ahead for the sector in 2015.

The country’s rig builders will have to weather turbulent seas in 2015. The sector will struggle under the combined weight of lower oil prices, an intense rig supply glut and continued capital expenditure cuts by major oil firms.

According to Maybank Kim Eng, these woes will only intensify further and rig builders will have to cope with order-intake misses next year.

The outlook has also worsened for international drillers due to a perceived rig oversupply, and recent data show that deepwater rigs are being renewed at 25-40% lower day rates.

“As a result, we expect drillers to defer their new-rig orders in 2015. Although orders for production assets such as FPSOs, topsides and accommodation assets are expected to be strong, they may not be sufficient to make up for weaker rig orders. Although asset owners with opex exposure are less likely to disappoint on earnings, they may not be spared either, from a sector de-rating,” noted Maybank Kim Eng.

Here’s more from the report:

Reflecting this, we cut FY15E-16E order intake for Keppel and Sembcorp Marine (SMM) by around 20%. We expect the market to follow suit eventually. Downgrade SMM to SELL from HOLD with a lower TP of SGD2.65, from SGD3.80. De-rating catalysts are expected from increasing execution uncertainties. Keppel has been kept at HOLD with a new TP of SGD9.00, down from SGD10.74.

We remain confident that non-drilling asset owners with the right fleets will secure jobs, thanks to their exposure to the entire value chain.

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