Why Singapore rig builders are still preferred over Chinese rivals

Established drillers wary of Chinese yard capabilities.

Barclays Research said that according to its discussions with major industry players, the outlook remains bright for Singapore rig builders to clinch orders from the ongoing demand boom. This is because Singapore rig builders continue to enjoy the support of established drillers, many of whom are still cautious of placing orders on the less reliable Chinese yards.

It noted with caution though that competition is intensifying as Chinese yards become more aggressive with pricing, and execution risks such as the December mishap at Sembcorp Marine that could erode confidence in Singapore yards.

Here's the full commentary from Barclays:

We attended the annual Offshore Technology Conference (OTC) in Houston, Texas last week, where most Asian yards were out in force, showcasing their wares. This year, there were a record number of industry participants, highlighting what we view as the current robustness of the oil & gas industry. Intensifying competition in the global rig-building space was demonstrated by the broad participation of yards internationally. Singapore yards Keppel Corp (OW; PT S$13.80) and Sembcorp Marine (EW; PT S$5.10) were present as expected. Following our discussions with various industry players including, drillers, equipment manufacturers and offshore service providers, we remain positive on the outlook for a sustained rig-order cycle and expect Singapore yards to continue to benefit from the strong demand for offshore drilling rigs.

Industry remains cautious on Chinese yard capabilities: The recent trend of orders being placed with Chinese yards has caused some discomfort amongst investors concerned by the possible impact on market share and margins for Singapore yards. However, commentary from various industry participants highlighted the speculative nature of many of such orders as well as the lack of 'blue chip' orders from established drillers. Many remained skeptical as well if established drillers would be willing to place orders with Chinese yards. 

Semi-submersible orders likely to return… The industry remained positive on the outlook for semi-submersible orders this year, following a quiet past three years where established drillers have been quiet. Demand for semi-submersible new builds is still likely to be driven from the North Sea where the harsh drilling environment still requires the stability of a semi-submersible over a drillship. Keppel remains hopeful of securing at least one order by 2H13.

… but preference for drillships going forward: However, it was also clear that that has been a shift in preference for drillships by many drillers and operators. This is becoming increasingly evident, with both Singapore and Chinese yards starting to compete with their own designs.

Drillship competition heating up: Sembcorp Marine took the opportunity to showcase its Jurong Espadon drillship design, while rig engineering company, Friede and Goldman displayed its new drillship design DS3810, which it expects to commission shortly. With Chinese yards currently building its first ‘Tiger’ drillships, and Keppel possibly coming up with a further new drillship design on top of its current ‘Slim drillship’ design, competition for new drillship orders looks likely to intensify further.

Risks: 1) the increasing competitive landscape, particularly the Chinese yards, which continue to offer aggressive discounts on rigs or attractive financing terms; and 2) execution risks, as highlighted by the accident in Dec at Sembcorp Marine.