Oil rout returns with a vengeance

A vessel from Triyards, which "enjoys a clean bill of health but is priced for distressed levels".
A vessel from Triyards, which "enjoys a clean bill of health but is priced for distressed levels".PHOTO: TRIYARDS

Oil-related firms struggle, with glut and rising US dollar likely to keep prices under pressure

Local oil-related plays again struggled as the oil rout returned with a vengeance yesterday, owing to a looming supply glut and drag from a strengthening greenback.

More headwinds are expected for the offshore oil and gas sector as oil prices in the next 12 months will likely stay under pressure, with firms wary of new investments amid a rebalancing oil market, said OCBC Investment Research. It has a neutral call on the sector.

"After Opec decided to abandon its traditional role of paring production to support oil prices, it became increasingly apparent that oil prices will remain low with weak global economic growth," it said.

Brent crude oil fell to as low as US$34.95 a barrel in trading yesterday, the lowest level since the financial crisis.

"If oil prices continue to be in the low US$30 levels, there may be more companies trying to defer taking delivery of rigs, or find fault with the rigs to get out of their contract obligations," remisier Desmond Leong said.


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Marginal deepwater fields are unprofitable, especially now that oil prices have dived, and some of these projects will be put on hold.

To weather the downturn, oil and gas services firms are selling non-core assets, diversifying into related businesses, or finding new customers in different regions to generate sufficient cash flows, according to RHB Research.

Firms with strong balance sheets, a healthy order book and the ability to diversify into non-oil and gas related sectors should be more resilient, OCBC said.

Rigbuilders, notably Keppel Corp and Sembcorp Marine, have come under pressure. Keppel inched up 0.6 per cent or four cents to $6.51 yesterday, and SembMarine fell 0.6 per cent or one cent to $1.775.

But both have diversified their offshore and marine operations away from pure rigbuilding assets. Property is Keppel's lifesaver, RHB said.

"Keppel's diversified operations - offshore and marine, property and infrastructure - could shield the group from the worst of the cyclical downturn in the oil market. Its well-timed privatisation of Keppel Land means the property division is expected to fully contribute to the group's financials. The outperformance from its China and Vietnam property markets has supported Keppel's bottom line," it said.

However, new yards are a drag on SembMarine, said RHB, which has a sell call on the stock. It also cited earnings disappointments, and "a deteriorating standard of corporate disclosure and transparency".

"The new Tuas yard has failed to deliver the repair revenues as promised at the end of fiscal 2014. The Brazilian yard is another source of operational worries - it is already well over-budget, behind schedule, and the uncertain political and economic situation in Brazil does not help improve the operational visibility within that country," RHB said.

Value is emerging in asset-heavy owners and charterers.

DBS Group Research, with a buy call on Ezion Holdings, cited its prudent business model. Ezion was up 0.8 per cent or 0.5 cent at 60 cents.

"Demand is relatively more resilient as service rigs are exposed to the production phase in the shallow-water segment. Only 10 to 20 per cent of Ezion's fleet, largely in Mexico, are deployed for developmental drilling, which sees relatively higher risks of cancellations amid low oil prices," DBS said.

Triyards, which slipped 2.4 per cent or one cent to 41.5 cents yesterday, "enjoys a clean bill of health but is priced for distressed levels".

"The stock has likely been beaten down by concerns over its parent, Ezra, but we believe such fears are overdone and, in any case, they do not apply to Triyards - which has negligible operational exposure to Ezra," RHB said.

Ezra slipped 2.1 per cent or 0.2 cent to 9.5 cents yesterday.

A version of this article appeared in the print edition of The Straits Times on December 19, 2015, with the headline 'Oil rout returns with a vengeance'. Print Edition | Subscribe