Keppel Sees Prolonged Dearth Of Oil-Rig Orders Amid Glut

Keppel Sees Prolonged Dearth Of Oil-Rig Orders Amid Glut
Keppel Corp., the world's largest builder of oil rigs, sees little prospect of an improvement in global demand amid a supply surplus that's caused quarterly profit to fall to the lowest in almost a decade.

(Bloomberg) -- Keppel Corp., the world’s largest builder of oil rigs, sees little prospect of an improvement in global demand amid a supply surplus that’s caused quarterly profit to fall to the lowest in almost a decade.

The company may consider reducing its workforce and mothballing some facilities in its rig-building operations because of excess capacity, the Singapore-based company said Thursday. Keppel Offshore & Marine Ltd. has already shrunk its workforce by about 11,000 and subcontractor headcount by some 8,500 since 2015, according to Chief Executive Officer Chow Yew Yuen.

"It’s about hunkering down," Keppel Corp. Chief Executive Officer Loh Chin Hua said at a briefing. "What we have seen in the industry, it’s not just about oil prices. We have to look at the oversupply of rigs and the current situation with the traditional customers."

Keppel sees a long, harsh "winter" in its rig-building business after net income fell 48 percent in the second quarter to S$205.8 million ($152 million). The company is among Asian shipyards that have cut jobs and are considering dock closures after oil prices more than halved in two years, leading to a slump in orders for offshore drilling and production, deferrals and cancellations.

The company has been hit by non-payments from one of its biggest clients, Sete Brasil Participacoes SA, which filed for bankruptcy protection in April.

Shares of Keppel fell as much as 1.8 percent to S$5.48 and traded at S$5.50 as of 9:27 a.m. in Singapore, while smaller rival Sembcorp Marine Ltd. dropped 2.6 percent to S$1.485. The stocks have both fallen about 15 percent this year, compared with a 1.8 percent advance in the benchmark Straits Times Index.

Keppel said the order outlook is weak because of oversupply of oil rigs and falling day rates, or the fees charged to lease a drilling rig. Demand is expected to return eventually when oil companies curb falling production and replenish declining reserves to meet the world’s requirements for fossil fuels. Revenue at Keppel fell 37 percent on year to S$1.63 billion in the second quarter.

The company has requests to defer delivery of three jackups for Grupo R, a Mexican energy company, and one jackup for Uruguay-based Parden Holding to next year, and will be compensated, it said. Jackup rigs are used in shallow waters and have extendable legs that allow them to stand on the ocean floor.

The offshore division has secured more than S$460 million of new orders in the year to date, with deliveries stretching into 2021. Its orderbook stood at S$4.3 billion at the end of June, falling from S$9 billion at the end of December 2015. The contract backlog excludes orders from Sete Brasil, for which Keppel has stopped construction pending payment.

"Even if new orders materialize in the coming quarters, we reckon that operating margins on those contracts will likely be mid-high single digit at best," Royston Tan, an analyst at Daiwa Capital Markets in Singapore, wrote in a note.

Sete Brasil accounts for a combined $10.5 billion in orders for semi-submersibles and drill ships at Keppel and Sembcorp Marine. The Brazilian company fell into financial difficulty after it was unable to secure long-term financing and its only client, state-run oil producer Petroleo Brasileiro SA, faced allegations of kickbacks.

The investigations into the scandal have wiped out nearly half of Brazil’s naval industry jobs in the past two years, leaving companies bankrupt and creditors unpaid. Keppel and Sembcorp Marine have yards in that country to cater to demand.

Other Asian shipbuilders face a similar situation as orders have dwindled. South Korean shipyards such as Daewoo Shipbuilding & Marine Engineering Co. are seeking to raise a combined 8.41 trillion won ($7.4 billion) selling assets as part of a restructuring, which also includes job cuts, after delivery delays led to losses last year.

Keppel’s property and real estate division was the biggest contributor to second-quarter profit and cushioned the impact of weak results in the offshore and marine business.


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Copyright 2016 Bloomberg News.

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