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Chinese state yards can withstand impact from rig order cancellations: Credit Suisse

Chinese state yards can withstand impact from rig order cancellations: Credit Suisse
Order cancellations are likely to happen to the 42 jack-up rigs due to be delivered from Chinese shipyards this year following the collapse of oil prices, but the yards are expected to be able to withstand the impact, according to Credit Suisse.

As crude oil prices continue to test new lows, with Brent crude falling below $50 per barrel for the first time since May 2009, offshore oil exploration and production activities have been directly impacted as oil majors start slashing their spending, with total capex (excluding Brazil and Australia) estimated to fall by 8% in 2015 year-on-year.

Gerald Wong, vice president of equity research at Credit Suisse, believed that the number of rig order cancellations is likely to increase.

Wong pointed out that Cosco Corporation (Singapore) recently warned of significantly lower earnings for its financial year ended 31 December 2014 due mainly to a one-off charge of around $90m relating to a discontinued job on an Octabuoy hull and topside module.

This year, there will be a record 72 jack-up rigs scheduled for delivery, of which only six have been contracted and 42 are due from Chinese yards. Speculative orders by new entrants accounted for 40% of the ordered rigs.

“A lot of speculators are going to walk out of their contracts because the payment terms that were offered to these customers were very attractive,” Wong told Seatrade Global, adding that the downpayments were as low as 1% or 5-10% as opposed to 20% in the previous market cycle.

“[The low downpayment] definitely makes it a lot easier for customers to walk out from the contracts this time round, so we are going to see more cancellations over the course of the next 12 months,” Wong said on the sidelines of the Credit Suisse oil and gas conference in Singapore on Wednesday.

But luckily for many of the leading Chinese yards involved in rig building, they enjoy financial backing from the state and they are expected to weather through the current downturn, he said.

The top three Chinese rig building yards are all state-owned. The trio, Chinese Merchants Heavy Industry, Dalian Shipbuilding and Yantai CIMC Raffles, are slated to deliver 11, 10 and six new rigs this year, respectively.

The jack-up rig growth is forecast to exceed demand across most segments in 2015, leading to lower utilisation and day rates for offshore assets, according to Credit Suisse. Moreover, the surge in newbuild deliveries will trigger the rig replacement cycle to put further downward pressure on utilisation and day rates, particularly for older assets.