News Analysis: Singapore offshore, marine players facing strong headwinds amid weak oil prices

As crude oil prices remain weak to date this year, analysts expect the operating environment of Singapore offshore and marine players to be challenging for the rest of the year and even next year.

The Singapore-based Keppel Corporation, which was the world's biggest offshore drilling rig builder, reported last week that both revenue and net profit falling on-year for the second quarter.

The tough environment of the sector was also indicated by Keppel's year-to-date net order-book, which stood at 11 billion Singapore dollars as of June, down from 11.3 billion Singapore dollars in the previous quarter.

The recent news front in the sector also looks discouraging. Transocean, a leading international provider of offshore contract drilling services for energy companies, announced a month ago a two-year delay to its two deepwater rigs being built by SembCorp Marine, another major rig builder in Singapore.

Pemex, the Mexican national oil company, had also extended its memorandum of understanding (MoU) with Keppel for six potential jack-up rig orders for after the first fiscal half this year, with the postponed deadline now becoming unclear.

Orders from Brazil's national oil company Petrobras, another major client of both Keppel and SembCorp Marine, currently also hangs in the balance.

According to J.P. Morgan Research, Petrobras-related contracts took up about 40 to 45 percent of Keppel's and SembCorp Marine's order books, and now there is an increased likelihood of backloaded payments for these jobs.

Nomura Research also expressed concern about the sector as it forecast day charter rates (DCRs) and utilization rates for offshore support vessels (OSV) and jackup rigs to remain on a downtrend, even if Brent crude oil prices recover to 75 U.S. dollars per barrel by the fourth quarter this year.

The average DCR as of June 2015 has declined 15 percent globally since the end of the third quarter last year and 26 percent since the peak in October 2013.

The fall was even more severe in Southeast Asia, where the DCR has plunged by 32 percent since the end of the third quarter last year. While the jackup rig utilization rate as of June 2015 is still above the trough of 68 percent in early 2011, it has dipped 10 percentage-points since the end of the third quarter last year to 74 percent.

Nomura said the hope in the sector for now is that the bearish sentiment would catalyze more deepwater rig scrapping, thereby setting the stage for a stronger cyclical rebound when it occurs.

In its earnings result release, Keppel also expected to see an acceleration in the replacement cycle for aging rigs, as it estimated that 94 jack-up rigs and 27 floating rigs around the world are more than 30 years old.

Nomura believes while deepwater rig scrapping is itself not sufficient to turn around the current downturn of offshore and marine sector, it is nonetheless a rare but rationale step towards stabilizing the global deepwater drilling market.

If the rig scrapping momentum is sustained for the rest of this year, it should set the foundation for an eventual and meaningful rebound for new rig orders, which could somewhat mitigate the impact of weak demands in other vessel types, due to weak crude oil prices. (1 U.S. dollar equals 1.37 Singapore dollars). Endi