Is Keppel Buying Into China?

Keppel Shipyard – Tuas, image: Keppel O&M

Keppel Corp., the world’s biggest oil-rig builder, may consider buying a yard in China as the nation boosts offshore drilling to meet rising energy demand.

Keppel, which already has one yard in China making parts for oil rigs, will seek out acquisitions if the government opens offshore projects by state-owned enterprises to foreign companies, Chief Executive Officer Choo Chiau Beng said in a Bloomberg TV interview yesterday in Singapore.

“If China is willing to open up its market to foreign- invested yards, for example, then of course we would be interested,” Choo said. “Right now, if a Chinese state-owned company wants to build a rig, they go to one of their own yards. In Brazil, we’re given the same chance as everybody else.”

Keppel is targeting emerging markets including China, West Africa and Mexico, as oil producers expand in new areas to offset waning reserves. The Singapore-based rig-builder, which operates yards in its home city as well as in the U.S., Qatar, Brazil and Indonesia, is seeking to move closer to its customers with new locations.

The possible expansion in China comes as the government encourages local shipyards to move into the offshore business. The country is targeting 20 percent of the global market for rigs, production facilities and other offshore products by 2015, according to the China Association of the National Shipbuilding Industry.

Offshore Threat

Chinese shipbuilders boosted output of offshore equipment 22 percent to 22.9 billion yuan ($3.7 billion) in the first 10 months, according to the shipbuilding group. New ship orders slumped 47 percent in the first 11 months to the least since 2003, according to Clarkson Plc, the world’s biggest shipbroker.

“Eventually, the Chinese yards will pose a threat to Keppel in the offshore business,” said Yeak Chee Keong, an analyst at Maybank Kim Eng Research Pte in Singapore, who rates Keppel a buy. “But in the short-term, customers will prefer established yards like Keppel because they know their orders will be delivered on time and on budget.”

Keppel won S$9 billion ($7.4 billion) worth of new orders this year through Nov. 26, helping increase its order book to S$12.2 billion. The company expects to deliver a record 21 rigs next year, exceeding its previous high of 14 in 2009.

The rig-maker has climbed 17 percent this year in Singapore, compared with 19 percent advances for the benchmark Straits Times Index and its biggest rival, Sembcorp Marine Ltd.

Picking Battles

Chinese shipyards Yangzijiang Shipbuilding Ltd. and Jinhai Heavy Industry Co. both announced their first offshore orders this month, helped by lower prices. Yangzijiang’s $170 million order for jack-up rig announced on Dec. 3 was lower than a similar order Keppel secured in April for $205 million. Lower prices are squeezing the profit margins of existing yards, including those operated by Keppel, Choo said.

“We must find new ways to compete, we must find battlefields that we can win,” Choo said. “We don’t compete with the giant in every area. There’s no need to. We can choose our battlefield.”

Keppel is building a second yard in Brazil as state-owned Petroleo Brasileiro SA develops the biggest oil discovery in the Americas in three decades off the country’s coast.

Keppel signed a $4.1 billion order in August to build five semi-submersible rigs for Sete Brasil Participacoes SA, an affiliate of Petrobras. It also received a $950 million contract to build a floating oil production unit for Petrobras.

The state oil producer is spending $236.5 billion as part of its five-year investment plan. The company has faced delays in carrying out exploration in the region and getting the rigs it needs to tap oil trapped under as much as 3,000 meters (9,800 feet) of salt and rocks below the Atlantic seabed.

“In Brazil, the Chinese yards can’t compete with us even though they’re cheaper in China,” Choo said. With Keppel’s rigs, “they can get delivery and go to work and earn money.”

Copyright 2012 Bloomberg.