Why Not the Rig Builders?

By Travis Johnson, Stock Gumshoe, June 13, 2008

I’ve written several times lately about deepwater drilling rigs, including, of course, my enthusiasm for Seadrill — but until earlier this year I also owned one of the bigger rig builders, a position I closed in the Spring. Why? And why wouldn’t one want to own the big shipyards and rig builders at a time when their order books are filled to bursting?

In one word: Costs.

The rigbuilder I used to own is Keppel Corp, also referred to as KepCorp, a big conglomerate that is one of the largest shipyard operators in the world. They also own quite a bit of land, interests in development and in oil refining, and some other assets, including shares in a wireless company and some other infrastructure stuff. But in the main, they are known for being a shipbuilder — they’ve built several next-generation jack-up rigs for Seadrill and have orders for a couple more over the next few years, and by all accounts they and all their competitors — Hyundai, Sembcorp, and others, are booked to the gills until 2011, and new yards are trying to get up to speed in Brazil and China to build more rigs in the coming years (it takes time — building rigs is tricky work, buyers want proven designs that are often proprietary, and they also want yards with a proven ability to come in on spec and on time for these very complex vessels). Clearly, the demand is still magnficent.

But the ugly side is costs. These rigs are clearly very expensive to build, as well as expensive to buy and run — and the skilled labor and steel costs alone can strangle you. To make matters worse, though they will probably remain profitable, many of the rigs that are coming out of these yards in the next couple years are probably, like Seadrill’s contracts, turnkey fixed price deals. That means that even though the yards costs have accelerated significantly with the rapid rise in steel and energy prices and the shortage of labor, they still have to deliver on spec and on budget based on budgets that in many cases were set in 2006 and 2007.

I saw some commentary recently from an analyst who noted that marine steel makes up roughly a fifth of the cost of a rig — and that this steel has gone up in price by something like 80% ...

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