Why benefits of lower oil price may take a year to trickle down

SINGAPORE (Nov 1): The plunge in oil prices has reversed the fortunes of many players in the offshore and marine industry, ranging from rig builders and shipyards to services and support providers. But with oil prices beginning to recover, KGI analyst Joel Ng expects shipyards to see limited downside although he believes benefits from the rising oil prices from OPEC cuts will take a year to reach the yards. Here’s why:

Overcapacity
The utilisation rates in the offshore oil and gas sector points to another year of overcapacity. Utilisation rates have dropped to 50% from 90% to 100% in 2013, and the pace of retiring old rig is not fast enough to balance out the markets. This oversupply is expected to persist into 2017, with the markets set to improve in 2018, as older rigs are retired and demand picks up. The number of jack-up rigs retired from the market has risen, with 11 scrapped in 2015 and nine year to date, compared to 13 rigs removed in the two years prior.

In Southeast Asia, 25 out of 66 jack-up rigs are currently working, a less than 50% utilization rate for a major destination for jack-ups. This pain is further exacerbated for rig owners, who incur costs to maintain idle rigs. “Hence, we may expect 2017 to still be a weak year for rig markets and consequently, for the rig builders, Keppel Corp and Sembcorp Marine,” says Ng.

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