More to come after Swiber, warn analysts

Companies that invested during the peak of the oil boom, just before oil prices crashed in the second half of 2014, and now have a substantial amount of debt and weak cash flow, are particularly vulnerable to funding problems, say analysts. Many are
Companies that invested during the peak of the oil boom, just before oil prices crashed in the second half of 2014, and now have a substantial amount of debt and weak cash flow, are particularly vulnerable to funding problems, say analysts. Many are operating at break-even levels just to obtain work to repay the interest on their debt.PHOTO: REUTERS

Continued poor crude market could drag down more companies in oil and gas sector

With low oil prices continuing to weigh heavily on offshore and marine companies worldwide, the deep troubles of mainboard-listed Swiber Holdings could be the start of more to come.

The debt-laden offshore services firm, which faces letters of demand amounting to US$50.5 million (S$67.7 million), initially filed to wind up and liquidate its business in a move that shocked the market last week. Late Friday, it switched tack and said it will put itself under judicial management instead - an option that offers at least some light at the end of the tunnel.

Analysts believe the hard-hit sector could see more such casualties.

KGI Fraser Securities analyst Joel Ng told The Straits Times that firms with a substantial amount of debt and weak cash flow are particularly vulnerable to funding problems.

  • $1.4b

    Amount in Singdollar bonds that oil-related companies have maturing up to 2018.

    $325m

    Amount due by the end of the year.

"These are mainly companies that invested during the peak of the oil boom, just before oil prices crashed in the second half of 2014," said Mr Ng. "There just isn't enough cash to go around, given the 20 to 30 per cent capital expenditure cuts across the sector over the past two years, so profit margins have been eroded. Companies are operating at break-even levels just to obtain work to repay the interest on their debt, which is similar to what Swiber went through."

Amid the weak demand and activity levels in the industry, it is "very difficult" for companies to raise cash by selling their assets.

"Potential buyers are waiting for prices to fall even more to scoop up cheap assets," he said.

Mr Roger Tan, chief executive of Voyage Research, added that loans for quite a few companies here will be due in the next few years. "Given the current conditions, refinancing these loans will be difficult," he said.

Already, SGX-listed Pacific Radiance, which owns and operates offshore vessels and provides subsea services to the oil and gas industry, expects its full-year financial results to be directly affected by Swiber's surprise move.

The firm said on Friday it expects to make a provision of about US$10.1 million for services rendered to Swiber's units. 

Earlier this month, Technics Oil and Gas and its unit were placed under judicial management after facing a series of claims. The plight of the company, which specialises in building modules and equipment for use in oil and gas exploration and production activities, had less of an impact as its market cap was only around $16.2 million compared with Swiber's $50 million.

Oil-related companies have $1.4 billion worth of Singdollar bonds maturing up to 2018, with $325 million due by the end of the year, according to Bloomberg data. Ausgroup and Otto Marine are among those in the sector that have started a process to loosen bond vows this year.

Shake-out can weed out excess capacity

Others with a high net-debt-to- equity ratio (a measure of a firm's debt) include Swissco Holdings, Ezion Holdings, Ezra Holdings and Marco Polo Marine.

Ezra Holdings - once a market darling - provides offshore marine services to oil and gas players. It has had consecutive quarters of losses, and there was speculation that banks were going to pull the plug earlier this year.

The group's Lee family was reported in March to be selling its Sentosa Cove bungalow, after disposing of a Good Class Bungalow in Windsor Park Road last October for $22 million.

That said, Mr Tan noted there are bright spots amid the gloom, as a shake-out could remove the excess capacity in the industry and bring about consolidation among the players.

Investors can also stand to gain. "The tide is down and those not wearing their pants will be exposed, but good companies will also be priced below their potential future value," he said.

"Good strategy, a strong balance sheet and high value-price differential are signs of a good investment opportunity. Investors have to ride out the storm first."

Correction Note: An earlier version stated that Pacific Radiance said it might not be able to recover about US$10.1 million it lent to Swiber's units. It has been corrected to say that Pacific Radiance expects to make a provision of about US$10.1 million for services rendered to Swiber's units. We are sorry for the error. 

A version of this article appeared in the print edition of The Straits Times on August 01, 2016, with the headline 'More to come after Swiber, warn analysts'. Print Edition | Subscribe