September 2013 China Rig Building The Tipping Point is Now Marine Money Conference, September 2013 +65 6671 8113 This report has been prepared by Religare Capital Markets Limited or one of its affiliates. This report does not constitute research or financial advice.
THE STRUCTURAL INVESTOR Shipbuilding Rig building in inthe Singapore Europe Singapore US Next??
THE STRUCTURAL INVESTOR Signs of an impending shift late last year
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THE STRUCTURAL INVESTOR Seven years since 2006 China has had a lot of time to learn and improve (US$m) 35,000 Rig order wins ex-petrobras by country China Korea Singapore Others 30,000 25,000 20,000 15,000 10,000 7 years for SG 7 years for China 5,000 0 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Singapore yards experience: 7 years learning starting from 1996 when Keppel and Sembcorp only delivered 5 rigs since 1981. China parallels: 2013 is 7 years from 2006 when China had delivered 10 rigs. Source: Rig Logix, RCML, Company Data. *Based on recorded data from Rig Logix, may not include some scrapped or unrecorded rigs. We also note that China started building rigs much earlier than 2005, as shown on Page 13. However, for practical purposes China s significant entry to the market was in 2005.
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THE STRUCTURAL INVESTOR In the post-gfc period ending Dec 2012, China won a respectable 41 rig orders Order wins since GFC as of end- 2012 China yards Singapore yards Korea yards Jackups 34 50 - Semisubs 4 1 + 6 (for Petrobras) 8 Drillships 3 0 + 7 (for Petrobras) 45 Total Ex-Petrobras 41 51 53 In the post GFC period we ve seen notable order win breakthroughs for Chinese yards till end of 2012: Sevan Drilling / COSCO Sevan ordered two cylindrical semisub rigs worth US$1bn with COSCO Nantong in March 2011. Opus Offshore / CSSC Opus ordered two drillship rigs worth US$1.1bn with CSSC Shanghai in Sep 2011. Seadrill / CSIC Seadrill ordered two high spec jackup rigs worth US$380m with CSIC Dalian in Nov 2010. Qatar Investment Corp / YZJ Qatar Investment Corp ordered one high spec jackup rig worth US$170m with YZJ in Dec 2012. Source: Rig Logix, RCML, Company, data include order wins in year 2010, 2011 and 2012.
China s order win momentum strong post-gfc through end-2012 (China in red) (US$m) 35,000 Rig order wins ex-petrobras by country China Korea Singapore Others 30,000 25,000 20,000 15,000 10,000 5,000 0 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
THE STRUCTURAL INVESTOR 1972
THE STRUCTURAL INVESTOR CSIC Dalian delivered its first jackup rig back in 1972 Early achievements 1960s: Starts developing shallow water platforms, driven by offshore oil discovery in Bohai Bay. 1970 s One of the earliest China-made jackup rigs, Bohai III 1972: CSIC Dalian delivers its first jackup rig Bohai I ; CSSC Hudong upgrades two vessels into a drillship Kantan I to perform E&P activities in the East China Sea. 1982 : CSIC Dalian builds first jack up rig of foreign design, Big Foot III for Baker Marine. Source: China Encyclopedia 1980 s The first China-made semi-submersible rig, Kantan III 1984 : CSSC Shanghai builds China s first semisubmersible rig Kantan III. 1988: CSSC Zhonghua builds China s first submersible rig Shengli III. 1989: CSSC Hudong builds China s first FPSO Bohai Friendship. Source: Harbin Engineering University
THE STRUCTURAL INVESTOR 2000E
JU2000E s The specialty of DSIC in Dalian China isn t just building low end vessels Chinese order wins include advanced high spec/harsh environment rigs: Fried & Goldman s high spec harsh environment JU2000E jackup. Built by Dalian Shipbuilding Industry Corporation (DSIC), CIMC Raffles, Shanghai Waigaoqiao Shipyard and ZPMC. DSIC has already delivered 8 of the JU2000 class and has an estimated 13 on order. Sevan Drilling s Cylindrical design semisub rig delivered and being built at COSCO Nantong. Gusto MSC s GM-4000 harsh environment semisub rig delivered by CIMC Raffles and COSCO Nantong
Many examples of China Offshore s advancement THE STRUCTURAL INVESTOR Offshore Structure Construction Yard Significance Owner Year of Delivery Semisub rig Hai Yang Shi You 981 CSIC SWS 6th generation semisub, R&D advancement CNOOC 2011 Semisub rig Noble Dave Beard CSSC Dalian 6th generation semisub Noble 2009 Jackup rigs - CJ46, DSI300, JU2000 CSSC Dalian First such classes built in China Up to 2011 Semisub rig - Sevan Driller COSCO Nantong First cylindrical semisub in the world, ultra deepwater Sevan Drilling 2009 Jackup elevated support vessel COSCO Nantong First such class built in China Remedial Offshore 2010 Semisub rig Island Innovator COSCO Nantong 6th generation semisub of GM 4000 design, world class MARACC 2012 Semisub FDPSO Octabuoy COSCO Nantong First such platform in the world ATP Oil & Gas 2013 Jackup wind turbine installer MPI Adventure COSCO Nantong First such class in the world, first 2nd generation jackup wind turbine installer built in China VROON 2011 Semisub rig GM 4000 design CIMC Raffles World class 6th generation semisub rig CNOOC 2012 Semisub rig F&G Millennium design CIMC Raffles World class 5th generation semisub rig Schahin 2010-2011 Semisub rig Frigstad D90 design CIMC Raffles World class 6th generation semisub rig Saipem 2010 Deepwater pipe laying vessel Hai Yang Shi You 201 Rongsheng First 3000m deepwater PLV built in Asia CNOOC 2011 FPSO 230k & 300k ton CSIC SWS CSSC Dalian COSCO Nantong World class FPSO ConocoPhillips BW Offshore 2004-2011 Source: China Association of National Shipbuilding Industry
Major Chinese yards built a significant track record (as of end 2012) Delivery Record Orderbook Shipyard Owner Tender Jackup Semi Drillship Total Tender Jackup Semi Drillship Total # Cosco Nantong/Dalian COS SP 1 3 4 5 3 2 1 11 2904 Dalian Shipyard CSIC 16 1 17 2 9 11 2072 CIMC Raffles CIMC 4 6 10 2 2 4 1520 Shanghai/Hudong CSSC 1 1 2 2 1100 SWS CSSC 1 1 3 3 598 STX Dalian STX 1 1 1 1 550 CMHI Shenzhen CMHI 1 1 4 4 760 CPLEC CNPC 3 3 3 3 530 Zhenhua Heavy Ind 1900 HK 0 1 1 220 YZJ Taicang Offshore YZJ SP 0 1 1 170 Guangzhou Huangpu CSSC 0 1 1 170 Jiangsu Rongsheng 1101 HK 0 1 1 145 Qingdao Beihai CSIC 2 2 0 0 CNOOC Engineering CNOOC 4 4 0 0 Summary 1 30 12 1 44 8 27 4 4 43 10,739 Total $m Source: Riglogix, Company Data, RCML. Note: *only accounting for rigs in the recent pre-gfc/post-gfc order cycle.
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Major Chinese yards bidding aggressively, with attractive payment terms offered to customers, helped by government support The ability to make offers buyers can t refuse. Interest, R&D, SOE bank loan, and tax subsidies help Chinese yards bid aggressively for projects. Attractive payment terms such as 10/90. Some Chinese yards are reportedly offering extremely favourable payment terms, in the range of 10% down and 90% on completion, or better. Meanwhile less-hungry Singapore yards are understood to generally offer 20/80 payment terms at best. Critically, Chinese yards do not appear concerned with near-term profitability or returns on capital. They appear more focused on creating a long-term structural shift of the rigbuilding industry to China. Hence they represent a very significant threat to Singapore yards.
Why China s government supports & prioritizes the offshore industry Extremely weak shipbuilding industry and shipyard overcapacity. Social stability, employment. National security in regards to self-sufficient access to energy resources.
China s central government has identified three clusters for development of the Offshore Industry Korea: Samsung Heavy Industries Geoje, Korea Hyundai Heavy Industries Usan, Korea DSME Okpo, Korea China Bohai Bay cluster: CSIC Dalian Dalian, Liaoning province CIMC Raffles Qingdao, Shandong province COSCO Dalian Dalian, Liaoning province China Yangtze River Delta cluster: COSCO Nantong, Jiangsu & Shanghai CSSC SWS Shanghai CSSC Shanghai/Hudong Shanghai YZJ Taicang, Jiangsu Rongsheng Nantong, Jiangsu ZPMC Shanghai China Pearl River Delta cluster: CMHI Shenzhen Shenzhen, Guangdong COSCO Guangdong Guangzhou, Guangdong Singapore: Keppel - Singapore Sembcorp Marine Singapore & Batam, Indonesia
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Key SOE s capacity will rival Singapore s capacity by 2017 Tier Group Shipyard Track record Target offshore product Identified expansion plans CSSC Shanghai Waigaoqiao Shipyard Deepwater semi, FPSO Jackup (u/c), FPSO, drillship, semisub 2 semi, 2 jackups p.a. after expansion Tier 1: Defense related SOEs CSSC CSIC COSCO Shanghai Shipyard and Hudong Zhonghua Shipyard Dalian Shipbuilding Industry, Shanhaiguan Shipyard and other yards Cosco Nantong, Qidong, Zhoushan, Dalian, Guangdong Built first LNGC in China (Received contracts of 4 from MOL) and early generation semi, repaired semisubs, jackups High spec jackups, ultra deepwater semi, FPSO, aircraft carrier 2x ultra deepwater cylindrical semisub for Sevan, 1x deepwater semisub for Odfjell, 7x FPSOs Drillship (u/c), LNG carrier (u/c) 1 rig p.a. Tender rig (u/c), jackup (u/c), semisub 13 rigs concurrently.* Jackup (u/c), semisub (u/c), drillship 13-17 rigs p.a. (u/c), and FPSO (u/c), mini LNG carrier (u/c), wind turbine installation vessel (u/c) Tier 2: Major SOEs CIMC CIMC Raffles Highspec jackup, ultra deepwater semi Jackup (u/c), semisub (u/c) 4 semi, 6 jackup rigs p.a. Total Key SOEs Tier 3: Private yards, not strategically important Other offshore yards Grand Total CMHI CMHI Shenzhen, and Haimen Highspec jackup, shallow water service rig Jackup (u/c), semisub, FPSO, FSP 5-6 jackup p.a. Yangzijiang Yangzijiang Taicang Nil Jackup (u/c) 1 rig p.a. About 40 rigs per annum* Rongsheng Jiangsu Rongsheng Pipelaying vessel for CNOOC Tender rig (u/c), jackup (u/c), FPSO 7 rigs concurrently* after expansion COOEC, ZPMC, CPLEC, Wison Shallow water jackups, production platform Jackup, semi, drillship, floating production (FPSO, Spar, TLP) No estimates given Above 40 rigs per annum* Even if we exclude private offshore yards, remaining expected Chinese rig building capacity will still rival Singapore s Source: RCML, Companies. Note: *We estimate that building capacity of 2 rigs concurrently will approximate 1 rig delivery p.a. capacity.
THE STRUCTURAL INVESTOR 2013
THE STRUCTURAL INVESTOR We ve gone through the end-2012 picture so what has happened in 2013?
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In 2013 we have seen a dramatic shift in market share Away from Singapore and towards China (%) China Korea Singapore Others 100% 80% 60% 40% 20% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Order wins excluding Petrobraa orders Country Drillship Jackup Semisub Tender Total Market Share Korea 4,876 1,300 2,355 8,531 41% China 5,501 1,300 170 6,971 34% Singapore 3,977 800 4,777 23% Others 350 150 500 2%
THE STRUCTURAL INVESTOR What China has achieved in YTD 2013: China won US$6.7bn drilling rig orders, ranked No.2 in the league table, with 34% market share China won US$5.5bn worth of jackup rigs, ranked No.1 in this segment. China won US$1.3bn worth of semisub rigs, about half of Korea s order win. Neither China or Singapore won drillships this year.
In 2013, Singaporean yards specifically cited direct competition from China as a threat the days of brushing off China as too inexperienced are over Keppel from their latest quarterly report: Mounting competition from Korean and Chinese yards... Sembcorp Marine said: Competition from the Chinese and Korean yards will impact margin. Source: MIIT, SMCEI, RCML
THE STRUCTURAL INVESTOR Profitability is under pressure due to expanded yard competition, and we believe profitability will continue to deteriorate Profitability of Singapore yards under pressure Operating margin of Sembcorp Marine and Keppel Offshore and Marine (%) Sembcorp Marine Keppel Offshore and Marine 35 30 25 20 15 10 5 0 2008/09 2008/12 2009/03 2009/06 2009/09 2009/12 2010/03 2010/06 2010/09 2010/12 2011/03 2011/06 2011/09 2011/12 2012/03 2012/06 2012/09 2012/12 2013/03 2013/06
Chinese yards aren t scaling the learning curve alone THE STRUCTURAL INVESTOR Multinationals are supporting China s offshore expansion: Equipment providers: National Oilwell Varco, Wartsila, etc Classification agencies: DNV, ABS, etc It makes economic sense for multinationals to support China s offshore expansion since Chinese yards can drive sales of thee multinationals value-added services.
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Seadrill appears to be comfortable building in China with 11 rigs under construction in the country Taken delivery of 1 jackup, 3 semisubs (Sevan), and 3 tender rigs from Chinese yards. Has 11 rigs under construction in China: 9 jackups, 1 semisub (Sevan), and 1 tender rig. Seadrill also recently acquired a controlling interest in Sevan Drilling. We see this as a sign that Seadrill is comfortable with Sevan s COSCO-built semisubs.
THE STRUCTURAL INVESTOR 2014
What to watch for going forward? THE STRUCTURAL INVESTOR Other top tier rig owners buying from China we believe this is likely by end-2014??? China maintaining its market share lead over Singapore by year end 2013
Conclusion 2013 marks the tipping point for a structural shift of rig building to China The more China wins, the more credible its yards become China is becoming a leading rig builder Solutions for Singapore? Invest in R&D, intellectual property, and move up the value chain away from simply building rigs to designing and owning offshore technology Change corporate cultural values from simply spending on hard assets (capex) and towards spending on R&D and intellectual property
THE STRUCTURAL INVESTOR Thank you!