Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The last time Singapore's marine-services industry was staring at what would eventually turn out to be an 18-year drought in demand for oil rigs, Ronald Reagan was starting his second term as U.S. president.

Macquarie Sees No New Jackup Orders in 2016 and 2017
The brokerage doesn't rule out a prolonged downturn similar to the previous 18-year drought
Source: Macquarie Research

Jackup rigs, used to drill for oil in shallow waters, saw orders evaporate between 1985 and 2003. As Macquarie notes, rampant overcapacity means such a prolonged slump could well occur again. That definitely would not be good news for the rig-building industry's two Singaporean leaders -- Keppel Corp. and Sembcorp Marine.

After a decade-long boom, there were zero new orders globally for jackup rigs last year. With oil prices swooning, and rigs' daily rental rates having crashed to $92,000 from $130,000 in 2014, there's a risk that 70 percent of Keppel and Sembcorp Marine's order book might get canceled, especially if the Petrobras bribery scandal in Brazil deepens, Macquarie analysts Somesh Kumar Agarwal and Justin Chiam wrote this week.

If the downturn does indeed end up being a repeat of That '80s Show, rig-builders' shares may have to give back much of the China-induced exuberance of the past decade. That could be quite painful for investors, including Temasek. Singapore's state investment company owns a little less than half of Sembcorp Marine's parent, Sembcorp Industries, and 21 percent of Keppel, Bloomberg data show. It can't be feeling very chuffed about the 47 percent slump in Sembcorp Marine over the past year, or Keppel's 26 percent slide.      

And there might be more trouble ahead. Since early 2004, the two stocks have returned about 300 percent, thanks primarily to hefty dividends. Those might now start thinning out.

A Decade of Gains at Risk
Cumulative change in share price
Source: Bloomberg

According to analyst estimates compiled by Bloomberg, Keppel's dividends will shrink by as much as 11 percent over the next three years, compared with annualized growth of 3 percent over the past three.

No orders coming in the door doesn't augur well for shareholders, who will be far behind debtholders in getting paid, and the latter will have substantial claims. Oil and gas-linked companies with outstanding Singapore dollar-denominated bonds have to refinance or repay some S$625 million ($435 million) of notes this year, a further S$390 million in 2017 and S$700 million in 2018, Bloomberg-compiled data show:

Coming Due
Oil & gas services companies' SGD-denominated bond maturities. Some S$1.7 billion must be found in the coming three years....
Source: Bloomberg

The other big risk comes from the duo's Brazilian yards. Japanese shipbuilders like Mitsubishi Heavy are cutting their losses and exiting as the Petrobras saga drags on. Stock in Ensco, the London-based owner of shallow and deepwater rigs, fell 15 percent in intraday trade Wednesday after Petrobras said it was scrapping a contract in the U.S. Gulf of Mexico because, it claims, Ensco knew about improper payments between a shipbuilder and a consultant when the drillship was constructed, a charge Ensco denies.

Analysts are being predictably slow in sounding the alert. Their median price estimate predicts a 25 percent jump over the next year in Keppel shares, and a 15 percent climb in Sembcorp Marine. Were that triumph of hope over experience to prove elusive, what might Temasek do? It recently decided to sell shipping company Neptune Orient Lines to CMA CGM at S$1.30 a share, after having paid as much as S$2.80 in 2004 to acquire a part of its 67 percent stake.

If the Macquarie analysts are right about Keppel and Sembcorp Marine eventually trading below book value, like South Korean yards do, then there may not be much point in Temasek's hanging on to the rig builders either.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net