By Rujun Shen
SINGAPORE Jan 23 Singapore's Keppel Corp Ltd
, the world's top offshore drilling rig builder, boasts
an $11 billion order book that will likely lift profits this
year as those rigs start to take shape.
There is one order that isn't on the books: the company's
first drillship - designed to probe for oil and gas in deep
water - which Keppel is building before even landing a customer.
With a likely price tag above $500 million, it's a big bet that
demand is hot enough to warrant the speculative risk, and a
challenge to South Korean rivals who dominate this segment.
Keppel's forte is jackup rigs - mobile platforms on
extendable legs - which are made for shallower water up to about
500 feet (152 meters). Drillships can operate in water as deep
as 12,000 feet.
Deepwater projects accounted for 44 percent of global
spending on offshore oil and gas field development last year,
and that's expected to rise to more than 54 percent by 2018,
according to Infield Systems, an energy research firm.
Consultancy Douglas Westwood forecasts global spending on
offshore oil and gas exploration and production will grow 15
percent this year to $135 billion, and hit $164 billion in 2016.
Two of Keppel's big South Korean rivals, Samsung Heavy
Industries Co Ltd and Daewoo Shipbuilding & Marine
Engineering Co Ltd, have started building jackup
rigs, prompting Keppel to test out deeper waters.
"After Samsung and Daewoo broke into the jackup market,
Keppel is trying to hit back and show they can break into the
drillship market and have the ability to compete with the South
Korean yards," said James Hearn, an Infield analyst.
An official at a Korean shipbuilder that also makes
drillships said: "Keppel has long experience in rigs and semis
(semi-submersible rigs) and has good relationships with drilling
firms. It has no track record yet, but could make its mark in
drillships over time." The official didn't want to be named as
he was not authorised to speak to the media.
Keppel took home orders worth about S$7 billion ($5.5
billion) in 2013 - primarily for jackup rigs - pushing its total
outstanding orders to a record S$13.6 billion at end-September,
and raising hopes that profits will rebound this year. Booked
orders start earning revenue once they are one fifth completed.
Full-year results from Keppel, more than a fifth owned by
state investor Temasek Holdings, showed that net profit
fell 26 percent last year to S$1.4 billion from a record S$1.91
billion in 2012, when it reported a surge in sales in its
But 2014 earnings will likely rebound as some of the rigs on
the order book start to contribute profit. Also, margins are
expected to improve as Keppel gets more efficient in building
rigs of its own design. A Reuters poll shows analysts expect
2014 net profit to rise to S$1.6 billion.
"In Keppel's case, the backlog is impressive because a large
majority of the contracts are repeat orders of its proprietary
design, which we can expect them to deliver a good margin on,"
said Clement Chen, a Barclays analyst. "Given the strong
contract momentum in 2013, it should translate into good margins
and profitability in 2014-16, as these contracts are delivered."
South Korea's rig builders are known for aggressively
pursuing orders, even at the expense of lower profit margins.
For the 2013 third quarter, Samsung Heavy, which generates
almost all its revenue from shipbuilding, posted an operating
margin of 5.8 percent, compared with the 16.5 percent operating
margin at Keppel's offshore and marine division.
Keppel declined to comment on its drillship ambition and
referred to a press release issued last month in which Chow Yew
Yuen, head of Keppel Offshore & Marine, said Keppel was offering
a differentiated design. "Since the launch of our design earlier
this year, we have received a very encouraging response from the
market, and we have decided to start constructing the first
drillship to this design," he said then.
Keppel hopes that enhancements such as the integration of
high-capacity blowout preventers (BOPs) - safety valves designed
to avert deepwater disasters like the 2010 Gulf of Mexico oil
spill - will appeal to customers looking beyond the standard
drillships that Korean yards offer, brokers said.
Keppel's drillship can handle BOPs designed to withstand
pressure of up to 20,000 pounds per square inch, which is above
the 15,000 psi of BOPs installed on new drillships today and
double the capacity on the majority of units in operation now.
AND THEN THERE'S CHINA
In recent years, Keppel and crosstown rival Sembcorp Marine
Ltd have seen their dominance in the jackup market
chipped away by mainly Chinese shipyards, who have turned to rig
building as demand for container ships, dry bulk carriers and
oil tankers remains depressed.
As of mid-December, Chinese yards had won 38 of the 78
jackup orders placed globally in 2013, ahead of Singapore's 30.
Among the 131 jackups under construction around the world, 61
were at Chinese yards and 47 in Singapore, data from IHS shows.
Even Korean yards that usually build drillships won 3 jackup
rig orders in 2013, after exiting that segment decades ago.
Keppel isn't alone in chasing the rising interest in
A number of Chinese yards, after some missteps in the early
days of building jackups, are becoming more reputable
contenders. Armed with an improving track record, low prices and
appealing payment terms, they are eyeing the drillship market.
Last week, Yantai CIMC Raffles Ltd, one of China's biggest
rig builders, won an order from Norway's Norshore Holdings AS to
build a small-sized drillship. Norshore has the option to build
three similar ones.
"Keppel has a reputation, and no one would worry about
that," said a Singapore-based offshore broker. "But the fact is
they've got no one ordering a drillship yet. Buyers wouldn't say
that that's because they don't believe in the quality of Keppel.
It would be because of commercial reasons."
($1 = 1.2749 Singapore dollars)
(Additional reporting by Joyce Lee in SEOUL; Editing by Emily
Kaiser and Ian Geoghegan)