Keppel's $800m contract win re-affirms semi-sub competitiveness

Clinched SOCAR contract dispels lingering doubts.

According to Barclays Research, the $800m contract win from SOCAR is significant not only because it marks the first non-Petrobas drilling semi-submersible contract for Keppel Corp since 2008, but also because it removes some doubt on fears that it can continue to win semi-submersible contracts.

Here's more from Barclays:

The US$800mn contract win from SOCAR announced Tuesday marks the first non-Petrobras drilling semi-submersible contract for Keppel Corp since 2008. Despite the numerous orders for Keppel for accommodation semi-submersibles and semi-submersible tender rigs, there have been concerns on the ability of the company to win drilling semi-submersible contracts. We believe that this order should now dispel some of those fears. For the overall rig-building markets, this is the second semi-submersible order in a week, following Diamond Offshore’s order last week. We reiterate our view that the strengthening demand in key semi-submersible markets could lead to several semi-subs this year. This is a view supported by our 2013 Global E&P Capital spending survey, where we expect global E&P spending to rise by 10% y/y to $678bn. Keppel remains our top pick in the rig-building space with its strong order and financial outlook.

Another order for a proprietary design – supportive of margins: SOCAR’s order of a DSSTM 38M semi-submersible drilling rig is an enhanced design of Keppel’s DSSTM 38 rig that it is currently building for Sete Brasil. We believe in-house proprietary designs are supportive of stronger margins as the company will have 1) prior experience in delivery and 2) be able to better control the supply chain especially if parts and equipment can be sourced in house. With Keppel’s seven jack-up orders to date, all based on its KFELS B class jackup designs, we believe the outlook for margins in 2014 continues to improve.

SOCAR could be back for more: The rig will be built at Keppel’s CSC yard in Azerbaijan and is expected to be completed by 4Q16. With the rig expected to be used in the Caspian Sea, the rig has been customized for the harsh environmental conditions. Keppel has been operating in Azerbaijan since 1997, and with a functional yard in the country, it bodes well for further orders. Comments made by SOCAR’s president give further hope that there could be additional contracts on the horizon. “We have ordered the first of our new next-generation rigs from Keppel. We are confident that the Keppel-designed rig is a robust and efficient rig that will increase our offshore drilling capabilities,” the president said.

A sign of more to come? We believe that there could be further orders of semi-submersibles this year, particularly with the strength in key markets like the North Sea and the Gulf of Mexico. See Barclays Research: Singapore rig builders: Positive order outlook from North Sea and GOM strength. Although there is no guarantee that the Singapore yards will get any contracts, a stronger demand picture should likely improve the supply and demand balance and could help ease some pressure on pricing and margins. Given their strong performance records though, we would expect each yard to have at least a 25% chance for every contract, given that only four established yards would fall under the ‘top quartile’ category for semi-sub new-builds.