Rig builders' cancellation woes mount on back of prolonged oil downturn

Earnings will continue to shrink for large-cap shipyards.

Persistently low oil prices have sapped oil majors' appetite for exploration projects, and Singapore-based shipyards will face heightened project cancellation risks on back of the prolonged downturn.

"Newbuild orders backed by charter contracts were perceived to be safe from cancellation, but with banks/investors becoming increasingly averse to additional financing in the energy sector, this may not always hold true," UOB Kay Hian said in a report.

The report noted that deferrals are now the norm as rig operators defer rig deliveries to cope with the downturn, with some operators cancelling outright in extreme cases.

As a result, large-cap shipyards will face significant earnings headwinds in coming quarters. A recovery is expected neither within 2H16 or in the mid-term, UOB Kay Hian Said.

“Coming quarters will be fraught with fresh delivery deferrals, the financial impact from Sete Brasil or worse, order cancellations. A cancellation entails a profit reversal, and puts the yards at risk of reporting a quarterly loss,” the report warned.

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