Abandon ship: Singapore rig builders are in crisis, and it’s even worse than the GFC

Don't expect a rebound anytime soon.

The global ripples brought about by the current oil downturn might prove to be too large for Singapore's largest rig builders to navigate safely.

Analysts at Macquarie caution that Singapore's offshore and marine sector is facing a structural decline, and that the current downturn is even worse than the Global Financial Crisis of 2008-2009.

"The SG yards’ business model will be under immense pressure from 2016-2020. A triple whammy of no rig orders, low quality non-rig orders and customer delays / lack of payment are leading to structural decline in returns and balance sheets in our view," Macquarie said.

Compared to the GFC when oil prices rebounded sharply immediately after the storm has passed, Macquarie believes that oil prices are going to stay low for the foreseeable future.

"A key driver of drilling rig demand is oil prices and with 2015E looking to record the lowest average oil price in the past 10 years and forecasts expecting this to continue, we think the rig market is in for a long downcycle. We now expect oil prices to remain lower-for-longer with our house estimating that Brent will average US$54/58/67 per barrel for 2015/16/17E," said Macquarie.

The problem of low demand is compounded by a supply glut in the offshore market.

“Rig orders bounced back within a year during the GFC. But the rig world is heavily oversupplied this time around. As many as 117 new Jack-ups and 37 new floaters will be delivered globally from 2016-18E, all of which are speculative builds (figure 12)," said Macquarie.

Keppel Corporation and Sembcorp Marine are also under threat from receiving low quality non-rig orders, which Macquarie believes dilutes returns.

Payment delays will also lead to increased balance sheet pressure for both rig builders.

"Rig orders bounced back within a year during the GFC. But the rig world is heavily oversupplied this time around. As many as 117 new Jack-ups and 37 new floaters will be delivered globally from 2016-18E, all of which are speculative builds,” Macquarie said.