Oil prices to stay low amid glut

Analysts say offshore and marine companies which have reported their results, such as Keppel Corporation and Vard Holdings, have fallen short of market expectations.
Analysts say offshore and marine companies which have reported their results, such as Keppel Corporation and Vard Holdings, have fallen short of market expectations.PHOTO: KEPPEL

Analysts say offshore and marine firms hit, with fewer orders and lower charter rates

Oil prices are likely to stay low for a long time as Iran is poised to rejoin the global economy, according to analysts. Talks between Iran and six major powers concluded earlier this month in a deal that gives the long-isolated Middle East economy the green light to export crude oil, in exchange for restrictions on its nuclear programme.

The global oil industry, already plagued by a supply glut, could see an additional one million barrels of crude enter the market each day.

Oil prices have tumbled from US$140 a barrel in June last year, on the back of strong production from the United States and members of the Organisation of the Petroleum Exporting Countries.

Supply has outpaced demand, particularly from China.

Global benchmark Brent was trading at around US$55 a barrel last Friday - a tad higher than the six-year low of US$45 in January this year.

SLOWDOWN

(Across the board), operating margins have declined, new contract wins year to date were fewer and revenue recognition was slower.

MS KUM SOEK CHING, head of South-east Asia research at Credit Suisse Private Banking and Wealth Management

Mr Calvin Lee, associate editorial director for Asia and Middle East oil markets at Platts, told a recent conference that current market conditions point to a "long trek" to an "equilibrium" price.

Even those who believe the current level of oil is unsustainably low do not expect a strong rebound.

OCBC Bank economist Barnabas Gan expects Brent crude prices to recover to US$70 a barrel for the second half of the year, given "the healthy supply outlook into the year". "At this juncture, global oil production continued to exceed demand, a phenomenon that had persisted since early 2014," he said.

"Notably, production into the second half of this year will likely see more pronounced upside bias, given rising supplies from Libya, Iraq and Iran."

Given the dismal prognosis for oil prices, offshore and marine firms are likely to find themselves facing strong headwinds, say analysts.

Ms Kum Soek Ching, head of South-east Asia research at Credit Suisse Private Banking and Wealth Management, said the offshore, marine and related companies will likely continue to see much weaker momentum in new orders, as well as lower charter and utilisation rates.

"We can also expect more capital raising from the sector, as companies with high gearing will likely see rising cashflow and balance sheet pressure," she added.

The corporate reporting season is midway and offshore and marine companies which have reported their results, such as Keppel Corporation and Vard Holdings, have fallen short of market expectations, say analysts.

Keppel posted a 2.3 per cent drop in net profit to $396.7 million for the three months to June 30, down from the same period the year before, while revenue sank 19.3 per cent to $2.56 billion.

"(Across the board), operating margins have declined, new contract wins year to date were fewer and revenue recognition was slower," noted Ms Kum.

Maybank Kim Eng investment analyst Yeak Chee Keong expects more misses and earnings downgrades from firms in the sector.

Over the longer term, however, the low-price environment would also help "flush out excess capacity and stimulate improvements in industry efficiency", he noted.

The Iranian deal could also spell an opening for companies with a foothold in the Middle East, although positive earnings contribution may not be immediate, said OCBC Investment Research analyst Low Pei Han in a report.

She cited firms such as SBI Offshore, Vallianz Holdings, Atlantic Navigation and KTL Global.

Ms Low is maintaining a "neutral" call on the sector overall.

A version of this article appeared in the print edition of The Straits Times on July 27, 2015, with the headline 'Oil prices to stay low amid glut'. Print Edition | Subscribe