Macquarie Equities Research (MER) released a research report yesterday signalling that Singapore yards have to brace themselves for more competition after the Korean yards’ recent push to get back into the Jackup market. It was reported Samsung Heavy Industries had won 2 large CJ70 Jack-up orders from Statoil for ~US$600m each.

Impact

More competition for the Singapore yards: Jackups are SG yards’ bread and butter with around 75% market share until last year. Chinese yards have been making a big push in the last 3-4 years, and now the Koreans have also dented the market.

However, Korean competition might be limited to “Large CJ70 Jackups”: Korean yards have categorically mentioned before that they are interested in large ticket Jack-up orders which can fetch them US$550-600m each vs the “Standard Jack-ups” which fetch only US$200m. Thus, MER thinks that the Korean competition will only be limited to these large Jack-up orders which are only 1-2 orders per year vs 20-30 standard Jack-up orders per year.

Chinese competition is a bigger long term worry: Chinese yards are becoming more aggressive with their financing arrangements which is why a couple of top tier contractors have started going to China now vs Singapore earlier. MER views Chinese competition as a more credible threat in 3-5 years.

However, Chinese yards are still feeding off local oil companies and low quality orders: Out of the 16 Jackup orders that Chinese yards have got this year, MER views most as low quality as they have been given by what MER calls “speculators” which are low quality buyers who emerge when oil prices are high. Chinese yards are also banking on their low upfront financing terms to lure customers, which MER does not think is a viable long-term strategy.

MER’s Outlook

Unprecedented Jackup demand in 2013 YTD; things have to cool down: MER has seen as many as 34 Jackup orders in past 5 months versus only 18 Jackup orders in the whole of 2012. This wave of new Jackup demand has surprised and worried MER as the orders to Chinese yards are not of very high quality. Thus, this momentum does not look sustainable to MER.

Jackup demand could slow down considerably: As many as 109 new Jackups are being built in various yards globally out of which 75% do not have contracts yet. Although given the huge replacement demand for old and obsolete Jackups, MER thinks this new supply will be absorbed, MER also believes that new ordering could slow down considerably over next 12 months.

SG yards building as many as 45 Jackups currently; Semisub orders will be key going forward: Singapore yards are now full until 1Q15 with very robust order books. However, for stock momentum and to keep yard slots full starting 2H15, MER thinks Semisub orders will be the key. In addition, Singapore yards could also make a dent into the Korean yards’ domination of the Drillship market in the long run via new orders from Brazil, in MER’s view.

Source: Macquarie Research - 6 Jun 2013