OFFSHORE activity in shallow waters will stay fairly “recession-proof” in the near term as oil majors move into the production phase, keeping offshore support vessels (OSV) players busy, says Nam Cheong Ltd CEO Leong Seng Keat.
The Singapore-listed firm, Malaysia’s No. 1 builder of OSVs and one of the largest in the world by vessel deliveries, saw its sales vault to a record 24 vessels worth RM1.56bil last year. As at the first quarter to March, Nam Cheong has sold seven ships.
“We should be able to sustain the 20%-30% growth momentum of the past few years,” Leong tells StarBizWeek.
He says that since much of the planned exploration activities over the past few years have been carried out, oil companies will now need the right type of vessels to help commercialise those discoveries.
Despite recent news that oil majors are cutting back on their exploration and production spending for this year as costs soar and shareholders complain of diminishing returns, Leong believes that operational expenditure budgets, especially for shallow water production, will remain intact.
“If anything, the cost-cutting will hit deepwater production first. Shallow water is less vulnerable because oil majors will always go for the lowest cost of production per unit.
“Shallow water oilfields meet 70% of global production today. This segment will continue to be recession-proof.
“There is also a baseline demand for energy that must be fulfilled, regardless of the ups and downs of the market.”
Leong points out that so far this year, enquiries from Nam Cheong’s international clients have increased, but the Malaysian market has been flat.
“That said, enquiries from Malaysia were heavy last year. The different regions have a way of balancing themselves out,” he notes.
On home soil, Nam Cheong expects to gain from national oil company Petroliam Nasional Bhd’s RM300bil, five-year capital expenditure programme for 2011-2015, the bulk of which has been earmarked for upstream development.
An estimated 70% of the funds will be spent in Malaysia, with 29% allocated for the Refinery and Petrochemical Integrated Development (Rapid) in Pengerang, Johor.
Although Nam Cheong is not a downstream player, Leong says it may benefit indirectly given that Rapid is likely to offtake locally-sourced hyrdrocarbon resources for feedstock rather than importing, which means jobs for OSV operators further upstream.
Malaysia, he quips, is seeing demand for accommodation work boats, small-sized anchor handling tug supply (AHTS) vessels and platform supply vessels (PSV).
“Malaysia has been a fantastic base for us. We have gone with the country to new frontiers.”
Over in West Africa, the localisation policies there, which favour locally-flagged OSVs, are presenting opportunities for first-time operators who will need AHTS and PSV, Leong adds.
Brazil, meanwhile, is experiencing continued demand for small-sized AHTS and mid-sized PSV. Petrobras, the state-owned oil company, is expected to charter an additional 200 OSVs over the next six years, according to projections by analysts.
“We’re pretty busy worldwide,” Leong says.
And with the new generation of drilling rigs coming onstream, larger-sized AHTS in the 6,000, 10,000 and 12,000 brake horsepower (bhp) categories will pick up, Leong explains.
Maybank Kim Eng said in a note to investors last year that some 169 rigs were expected to begin operations between 2013 and 2015.
Assuming an OSV-to-rig ratio of four OSVs to one rig, the rigs will require the use of 650 OSVs.
Nam Cheong’ shipbuilding programme for 2014-2015 comprises 30 vessels this year and 35 next year, up from 20 last year and 13 the year before.
The firm’s forward sales looks solid: of the 30 ships it has committed to build this year, 60% have already been sold, while seven from next year’s pipeline of 35 OSVs have secured owners.
Leong says Nam Cheong is targeting to launch a new line of fuel-efficient vessels this year.
“In terms of pricing, the new ships will be sold at a premium to the current make,” he adds.
Industry data suggest that the OSV market is still on an upward trajectory after the doldrum years of the global financial crisis in 2008.
According to IHS Petrodata figures, the number of rigs in operation as at May 14 stood at 743 versus 668 last year.
Some 30% of the global AHTS fleet is above 25 years old and will eventually be replaced by newer, more-efficient vessels, spurring shipyard owners like Nam Cheong.
The Miri, Sarawak-based firm posted first-quarter results that beat expectations, with revenue surging 74% to RM407.3mil, and net profit up 99% to RM71.3mil on higher vessel deliveries.
It has an order book of RM1.4bil made up of 23 vessels for delivery up to 2016. Two-thirds of its business is from repeat customers.
Nam Cheong’s market share is estimated at 12% globally and 75% in Malaysia.
The company, which was listed via a reverse takeover of Eagle Brand Holdings Ltd on Singapore’s Main Board in May 2011, owes its above-industry profit margins to its build-to-stock (BTS) manufacturing model, which sets it apart from conventional shipbuilders that only start constructing a vessel after receiving a firm order.
With BTS, Nam Cheong builds ahead of demand based on the type of vessels it believes OSV operators want to employ in a given period.
Roughly 80% of its production is outsourced to shipyards in China’s Fujian, Mawei and Xiamen provinces, where ships can be produced cheaply and quickly.
While Nam Cheong is able to charge a premium for its BTS ships due to their speed to market (OSVs can take up to two years to build), it will also put the firm in a tight spot if the market turns and demand for its newbuilds dries up, leaving Nam Cheong with unsold ships.
Still, it has a track record of selling all of its BTS vessels about six months prior to delivery, and even throughout the financial crisis, when many shipowners went under, its gross profit margins did not dip below 15%-20%.
Nam Cheong has sold more than 100 BTS ships since 2007.
Because of their availability, vessels built via BTS enjoy gross profit margins of 15%-20%, which is double the margins of conventional shipbuilding.