3 key reasons rig building boom could last for 2 more years

Rig-ordering cycle which kicked off in Oct10 is unceasing.

Sete Brasil has awarded contracts for the package of 21 drilling rigs, in which both Keppel and Sembcorp Marine (SMM) secured their fair share, within consensus expectations. According to MayBank KimEng, while the Petrobras-related contracts had accounted for a substantial chunk of rig contracts for the duo this year, this does not yet mark the end of the rig-ordering cycle.

"We believe that rig order flows would remain robust and we continue to favour the rig-building yards (Keppel, SMM, SCI)," it said in a report.

Here's why the positive outlook:

1. More offshore discoveries.

Global offshore drilling activities are growing in major regions such as the Gulf of Mexico, West Africa, Brazil and the Asia Pacific. According to IHS, in the last 10 years, more than half of the new global oil and gas reserves were discovered offshore. As onshore oil gets depleted, the move to deeper waters becomes inevitable.

2. More reasons to trigger rig-replacement cycle

For several years, it has been suggested that a rig-replacement cycle is imminent given the underinvestment over the past two decades. Furthermore, half of the existing fleet is more than 25 years old. Other than being inefficient, many of these rigs do not have the sophisticated technology required for more complicated and deeper water operations. With the additional factors mentioned in the previously, we believe that current conditions are more pronounced to trigger such a replacement cycle.

3. Historical proof.

Previous rig building boom lasted for at least four years and were supported by periods of sustained high oil prices following the oil shocks in the 1970s. The current rig-ordering cycle started in October 2010 and has been unabated for two years. Barring any major fallout in the global economy, and a similar scenario of sustained high oil prices, we believe that the current cycle is real and could last for another 2 years at least.