Singapore Oil and Gas Industry Still In Recovery Mode Two Years After Meltdown
The oil and gas industry is a core pillar of Singapore’s export-dependent economy. Two years after oil and gas prices plunged to multi year lows, the country’s bright economic prospects are still in jeopardy as big players in the energy sector remain skeptical about new investments.
O&G sector remains muted
Market watchers have already warned that the industry could remain muted for much longer as the likes of Keppel Offshore & Marine, Sembcorp Marine (SembMarine), RK Offshore, and Pacific Radiance continue to close down yards and slash jobs in a bid to conserve capital. Large scale projects that were expected to drive growth in the energy sector are getting deferred as new orders continue to be slow in coming.
Growth in demand for energy in emerging economies such as India and China led to a bevy of activities on the exploration and production front in the past. Fast forward, demand has dropped and backlog orders for some for the big players in the industry remain at multi year lows.
Order backlog for Keppel Corp stood at US$2.5 billion in the first quarter, below 2013 peak of US$13.1 billion. Analysts at Citi have warned that investors should not expect a strong production order-led recovery this year, given the slowdown in the industry.
Debt woes is another concern facing the industry as companies grapple with debt loads accumulated when oil traded at highs of $100 barrel. Three of the country’s largest banks, DBS Group Holdings, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank reported weak financial results last year attributed to bad loans tied to the oil and gas industry.
Unless oil and gas prices stabilize at levels where companies can be able to make sizeable returns on their investments Singapore economy will remain under pressure. Defaults among oil and gas companies are already fuelling concerns that it could lead to tighter financing conditions something that could spill over to other sectors of the economy such as real estate.
“Our own estimates suggest $5.8 billion of bonds of real estate, oil and gas, and home building companies maturing from Dec 2016 till end 2018,” said UOB Kay Hian.
Keppel explores fish farming
The turmoil in the oil and gas industry is already making companies rethink their investment strategies as they look to stay in business. In addition to reducing investments on new projects and reducing operational costs, Keppel Offshore and Marine has already set its eyes on another industry as it seeks to diversify its offshore technologies.
The rig designer has in the past year transformed some of the structures used for drilling oil with a view of using them for modern fish farming. The company has already showcased one of the structures which consist of a semi-submersible attached to six hexagonal fish cages. The cage is to be submerged under water and can be controlled remotely. It can also be raised above sea level to harvest fish or for maintenance work
Keppel’s idea is not something new in the industry. A number of Norwegians companies have already converted deep sea oil and gas rigs to fishing platforms. The fact that rigs in Norway are supporting annual fish production of up to 8,000 tones all but justifies the company’s new business opportunity. Fish rigs could help Keppel Offshore and Marine offset some of the losses in the oil and gas business
“I think it is good that Singapore companies like Keppel are looking at some of these areas as well, and who knows … I hope they can work with some of our local farmers to make it a reality for Singapore as well,” said Senior Minister of State for National Development and Trade and Industry Koh Poh Koon.
Pacific Radiance starts restructuring process
Pacific Radiance on its part is not looking to venture into new business even on feeling the full effects of the downturn in the energy sector. The leading offshore vessel owner has embarked on a financial restructuring strategy, buoyed an uptick in the utilization of its support and subsea vessels.
The company has opened discussions with its bank lenders as it seeks to reach agreements geared towards restructuring its debt holdings. Pacific Radiance reported revenues of US$17.5 million for the second quarter up from US$12.5 million reported last year. The increase was mainly due to improved fundamentals in the industry depicted by steady rise in repair revenue and subsea service sleet.
SembMarine’s growing backlog
SembMarine is another company that has been busy amidst a slowdown of orders in the oil and gas industry. The company is in the process of selling some of its rigs valued at about $400 million after the expiry of existing deferment agreements with Malaysia’s Perisai Petroleum Teknologi.
The company’s order book has already hit the $3.8 billion mark after the company secured a contract for hull carry works in Brazil worth US$145 million. However, the company is currently exploring number of options as it looks to shore up its capital structure
“Some of the possible outcomes include the divestment or privatization of SembMarine. For the funding of the latter, divestments of non-core assets could help to shore up capital, and this could include SembCorp Design and Construction, as well as Singapore MINT,” said OCBC Investment Research lead analyst Low Pei Han.
Emerging markets may help support demand for now
Singapore will continue to be the hub of advanced manufacturing and engineering in the oil and gas industry amidst the downturn in the industry. Ongoing economic recovery in Europe and the U.S should continue to support the export-dependent economy, which should in turn have an impact on the energy industry.
The pursuit of opportunities in emerging markets in Africa by the likes of Keppel Offshore & Marine, SembMarine, RK Offshore, and Pacific Radiance should also continue to support the oil and gas industry. However, a full recovery of Singapore oil and gas industry is dependent on major oil producing countries reaching an agreement that will shore up prices to levels that justify new investments.