Would Keppel Corporation Limited and Other Major Rig Builders Suffer From Cancelled Or Delayed Orders?

When the price of oil collapses (and it already has, from a peak of more than US$100 in mid-2014 to US$50 or so now), there’s a chain reaction of negative impacts to companies in different parts of the industry.

The first to get hit will be the upstream oil explorers, such as KrisEnergy Holdings Ltd (SGX: SK3), as they would likely find it tough to earn a decent profit with the price of oil being low.

As the oil producers no longer find the drilling of oil as profitable as before, activity slows and this can affect the service providers to the oil & gas industry like Ezra Holdings Limited (SGX: 5DN) and Ezion (SGX: 5ME).

Concurrently, with oil producers struggling, capital expenditures will also be cut. When that happens, rig builders and equipment manufacturers – like Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) – will be the ones feeling the pinch.

With China-based ship and rig builder Cosco Corporation (Singapore) Limited’s (SGX: F83) Wednesday announcement, it appears that we’re seeing the last impact happening right now.

On Wednesday, Cosco revealed that one customer of its 51%-owned subsidiary, COSCO (Dalian) Shipyard Co., Ltd, had requested to delay the deliveries of two jack-up rigs for nine months.

In the oil & gas industry, it’s quite common to see orders being delayed or cancelled in a downturn. With the price of oil now some 50% or more lower as compared to the middle of 2014, it’s possible that many speculative rig buyers (those who place orders for rigs without having any drilling contracts inked beforehand) may no longer feel that it’s worth it for them to take delivery of the rigs they’ve already ordered. If that really is true, then tougher times may be ahead for many rig builders.

This then raises the question: Would major Singapore-based rig builders like Keppel Corp and Sembcorp Marine face similar requests for delayed deliveries or worse, cancelled orders? Back in February, Sembcorp Marine revealed that it’s already facing issues with collecting payments from one of its customers based in Brazil.

As of the end of 2014, Keppel Corp and Sembcorp Marine have net orderbooks of some S$12.5 billion and S$11.4 billion respectively. Some 31% of Keppel Corp’s orderbook are for jack-up rigs while more than half of Sembcorp Marine’s are for drillships.

There’s currently no announcement of any major cancelling of orders or requests for delayed-deliveries from both Keppel Corp and Sembcorp Marine. But, investors might still want to keep an eye out for any trouble ahead.

When there’s an earthquake in the middle of the sea, it takes some time before the tsunami hits the shore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Keppel Corporation.