Shipbuilders turn to wind farms as profits sink

Ezion, Keppel are scrambling to diversify.

When oil prices collapsed, many listed shipbuilders and vessel charterers scrambled to diversify in order to stay afloat as client demand dried up and their traditional income sources vanished. Offshore player Ezion, for instance, has turned to wind farms in a bid to diversify its dwindling earnings base.

Ezion has formed a joint venture with a Chinese state-owned enterprise to deploy its service rigs to support the offshore wind farm market. According to analysts, this strategy will allow Ezion to ride out a longer-than-expected slump in oil prices, will provide the company with vessel deployment opportunities, and will open up the possibility of securing rare newbuild contracts.

“With the downturn in the oil and gas industries, offshore players are increasingly looking at the offshore windfarm industry for vessel deployment and newbuild opportunities. Looking ahead, it will not be surprising if more offshore players pursue opportunities in this still-growing
segment,” notes Low Pei Han, equity analyst at OCBC.

Will it pay off?

Ezion is not the only shipyard to venture into the offshore wind farm market. Keppel Corporation has delivered the Seafox 5, a multi-purpose self-elevating platform for wind turbine installation and maintenance, while Keppel Verolme has also built a mobile offshore accommodation barge for a German wind farm. Meanwhile, Sembcorp Marine has also designed and built an offshore substation platform for the Dudgeon Offshore Wind Farm, amongst other work.

However, despite Ezion’s attempts at diversification, Low cautions that the operating environment is expected to remain difficult in view of the depressed state of the group’s core sectors. Analyst, Foo Zhi Wei of UOB Kay Hian echoes this sentiment, noting that offshore players will continue to grapple with shrinking earnings as the industry suffers steep capital expenditure cuts.

Foo warns that even if large-cap shipyards such as Keppel and SembMarine shift to production assets rather than rigs, they will continue face "significant" earnings headwinds due to a dearth of new orders in the foreseeable future.

“The global oil and gas industry faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry − among oil companies, service providers and shipyards,” Foo notes.

“Offshore wind farms cost twice that of onshore wind farms. Wind farm developers are currently running on government subsidies – which take as much as 6-12 months to arrive – so cash flow will become an issue. The projects are likely to run into financing issues that will slow down installation progress or stymie future projects. Ezion is presumably aware of the risk, judging from its deployment of two vessels in the interim,” Foo says.