Local shipbuilders’ profits to sink as massive jackup rig glut looms

New orders will plunge in 2015.

The worst is yet to come for domestic offshore and marine firms, as new orders jackup rigs are expected to dip significantly in 2015 on the back of massive oversupply.

According to Nomura, there will be a 71% y-y jump in scheduled jackup rig deliveries to 65 in 2015, and only 8% of these new-build units are contracted to-date.

This will be the second-highest annual deliveries on record, only surpassed by the 76 units in 1982.

“With the DCRs and utilization rates already facing downward pressure YTD from a total of 78 deliveries in 2013 and 2014, we believe the worst for jackup rigs has yet to come, unlike our outlook for floaters. We expect global jackup rig orders to weaken y-y in 2015F, due to the risk of near-term oversupply. This risk is expected to afflict KEP worst, as it is traditionally the runaway leader for global jackup rig orders. SMM will also be affected by the jackup rig orders slowdown globally, but this can be mitigated by drillship orders exposure,” noted Nomura.

Here’s more from Nomura:

We expect more downside to jackup rigs’ (>300ft WD) average DCR in 2015F, despite having dropped 13% as of August 2014 to USD158,000 from the peak of USD182,000 in October 2013. 

Note that the premium jackup rigs (>300ft WD) have dominated new orders since 2004. With current new-build jackup rig prices at record highs, and the drop in average DCR by August 2014, this has worsened the investment metrics of newbuild jackup rigs, and will diminish the incentive to place orders in 2015F. 

We estimate the payback period for new-build jackup rig orders to be 7.9 years, which is worse than the 7.2 years in 4Q10. Yet, global jackup rig owners are about to receive a total number of 113 jackup rig deliveries in 2015-16F, while it took twice as long for the world to see a total of 108 newbuild deliveries in the four years to 2014.