In recent months, there have been talks about green shoots in the Oil & Gas (O&G) industry with the gradual recovery in oil price. In particular, SembCorp Marine managed to sell 9 jack-up rigs to Borr Drilling for USD1.3B in Oct. Are O&G shipbuilders & rigbuilders finally poised for a long-awaited recovery?
The answer can be found in the industry value chain, because an upstream customer's capital expenditure is a downstream supplier's revenue. If the customer is increasing its capex, it means that the supplier will likely see increasing revenue in the coming quarters. Conversely, if the customer is decreasing capex, the supplier will likely see decreasing revenue subsequently.
In my last week's post on A Peek into Offshore Support Vessel Companies' Prospects, I listed the capital commitments of the various Offshore Support Vessel (OSV) companies listed on SGX. Their capex will have an impact on the small- to mid-cap shipbuilders that build OSVs, such as Nam Cheong, Triyards and Vard. Even though some of the OSV companies reported increasing lease commitments from charterers, the capital commitments are mostly declining as the companies either (1) stop placing new orders, (2) cancel orders, and/or (3) charter vessels from other vessel owners, which could be returned if business conditions were to take a downturn. The capital commitment figures, obtained from the companies' Annual Reports, are reproduced below for easy reference (all figures are in US dollars).
|Atlantic||Dec 16||$ 42.2||$ 100.9|
|Falcon||Jun 16||$ 501.1||$ 501.1|
|Mermaid||Dec 16||$ 0.5||$ 373.6|
|Pac Radiance||Dec 16||$ 69.6||$ 209.4|
|POSH||Dec 16||$ 85.6||$ 138.6|
|Vallianz||Mar 17||$ 198.2||$ 270.0|
|Ezion||Dec 16||$ 440.9||$ 258.5|
After the publication of the Annual Reports, the companies have continued to cut capex. Ezion announced in Feb a reduction in capex of USD270M, while Falcon announced in May that it had cancelled orders for 3 out of 4 jack-up rigs. Ezion's decision to defer its capex dealt a serious blow to Triyards, which is building 3 of Ezion's service rigs (see Know Your Customers Well! for more info). Falcon has another oil rig worth USD86.9M completed but has not taken delivery of. The builder of Falcon's oil rig is believed to be Keppel Corp (Falcon is listed as a client in Keppel Corp's Offshore & Marine order book in its financial results presentation).
For Keppel Corp and SembCorp Marine, the more important customers are the international oil drilling contractors. Some of them report their fleet availability regularly, such as Borr Drilling, Ensco, Maersk Drilling, etc. Borr Drilling's fleet status report for Nov shows that it currently has 13 oil rigs. Of the 13 rigs, 5 are in warm stack and 4 are in cold stack. Only 4 have active contracts. Ensco's report as at 19 Oct shows that it has 37 jack-up rigs, of which 7 are available for contracting, 6 cold-stacked and 2 preservation-stacked, leaving 22 in active utilisation. Maersk Drilling's fleet utilisation as at 1 Dec is 11/15 (i.e. 11 out of 15) jack-up rigs, 4/4 semi-submersibles and 2/4 drillships. Given that there are still slack in the industry, Borr Drilling's purchase of 9 jack-up rigs from SembCorp Marine is the exception rather than the rule and does not signify more O&G orders to come for the rigbuilders.
Thus far in 2017, Keppel Corp's new O&G orders are for Floating Production, Storage and Offloading (FPSO) conversions and Liquefied Natural Gas vessels. None of its new orders are for jack-up rigs, semi-submersibles or drillships. Likewise for Sembcorp Marine.
Hence, despite talks of green shoots in the O&G industry, my opinion is that a recovery for the O&G shipbuilders and rigbuilders is still quite far off. The upstream sectors have to recover first before the benefits trickle down to the shipbuilders and rigbuilders. See The Missing Link Between Oil Price & O&G Profitability for more info.
Just a disclaimer, this post is not a recommendation for anyone to buy or sell any O&G stocks.