Published October 3, 2008

Rough seas ahead as credit crunch squeezes shipping

By VINCENT WEE
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THE mantra at the past few results briefings of major shipyards Keppel Corp, Sembcorp Marine and Cosco Corp (Singapore) has been that in various ways they all have 'good' customers who will not cancel contracts or default in any way. But as the days of the credit crunch get darker, one wonders if this is a case of whistling in the dark.

Drillers may be faced with little choice but to defer newbuilds, says Kim Eng's Rohan Suppiah.

Small cracks are starting to appear in the bold front from various quarters. UpstreamOnline reported earlier this week that Norwegian rig contractor MPF Corporation had gone bust despite trying to stay afloat under Chapter 11 protection.

Upstream said the company was hit by spiralling costs on its ambitious new drillship, the Multi-Purpose Floater 01 (MPF-01), touted as the world's first combination drilling and production floating platform.

The unit's hull lies at Cosco's Dalian yard awaiting mobilisation to Keppel Shipyard for fabrication of topsides.

Keppel itself has yet to disclose the fate of the 140 million euro (S$283 million) floating heavy lifter project which its Dutch yard Keppel Verolme signed with MPU Offshore Lift at the end of 2006 and who then filed for bankruptcy this July.

From the shipping side of the industry, some indications also started to appear this week when Star Cruises announced on Tuesday that a US$218 million sale- and-leaseback deal on one of its ships had fallen through. Although this will have little impact on Singapore yards, which are barely in the cruise ship market, what it suggests is a nervousness in the market that was not there two quarters ago.

And while contracts are still flowing through, the pace of expansion of some of their clients must be starting to pose a worry. Norwegian rig contractor Sea Drill, for example, in one fell swoop ordered nearly US$1 billion worth of jack-up rigs from both SembMarine and Keppel in June.

And it continues to have both new and outstanding orders with both yards while at the same time trying to take over competitor Scorpion Offshore.

If a giant like Sea Drill were to encounter problems with its credit lines, it won't be long before the banks start a panic run out of the sector, regardless of what the oil price is or is expected to be.

Some analysts remain confident about the sector for now. DMG and Partners analyst Serene Lim has maintained her 'buy' call and $4.28 price target on SembMarine based on sum-of-the- parts valuation.

Factors like continued contract flows from new clients, like the recent US$229 million jack-up rig deal with Sinopec, were cited as 'a pleasant surprise'.

Kim Eng Research's Rohan Suppiah, on the other hand, cut Keppel's rating to 'hold' and target price to $7.65 on concerns that order flow may dry up.

'While we have highlighted that offshore demand should remain strong on the back of the need for increased crude oil production, drillers may be faced with little choice but to defer newbuilds as banks may be unwilling to continue to finance a business that is highly capital intensive and risky in nature,' said Mr Suppiah in a note issued yesterday.

That, in a word, simply means that the industry must brace itself for possible storms, squalls and shallows around the corner.