Stressful year for oil and gas sector

Exploration and production companies' bottom line may be hit: Moody's


This article was first published on Jan 7, 2015

Oil and gas producers and the firms that service the energy industry are in for a tough year as slumping oil prices hit new lows, said Moody's Investors Service yesterday.

The warning came as crude slid below US$50 a barrel yesterday for the first time in nearly six years.

"If oil prices remain at around US$55 a barrel through 2015, most of the lost revenue will hit the exploration and production companies' bottom line, which will reduce cash flow available for re-investment," said Mr Steven Wood, Moody's managing director of corporate finance.

"As spending in the sector diminishes, oilfield services companies and midstream operators will begin to feel the stress."

The Organisation of Petroleum Exporting Countries (Opec) has resisted calls to cut output amid a battle with United States shale producers for market share.

Brent crude fell as low as US$51.23 a barrel on Tuesday, its lowest level since May 2009 following moves by key Opec producer Saudi Arabia to cut prices for European buyers heightened worries about oversupply.

This added to bearish data showing that Russia's oil output last year hit a post-Soviet-era high while exports from Iraq, another major producer, were the highest since 1980.

The slump in crude prices has accelerated as the United States dollar gained against the euro amid investor concern that Greece might leave the currency union.

Cheaper oil has raised the prospect of more mergers and acquisitions as asset valuations decline, particularly in the offshore support vessel segment, where a number of companies have been trading at significant discounts to book value in recent weeks.

"When oil prices were above US$100, it was rare to find an oil and gas company trading below book value. But now, it's quite common," remisier Alvin Yong said.

"Offshore support vessel companies, due either to a squeeze on margins because of rig owners cutting back on spending or construction contracts getting fewer, may have to merge to strengthen their market position."

Ezra Holdings is trading at 50 per cent discount to book value, given its closing price of 53 cents yesterday. It could be a prime target for takeover if valuations continue to remain depressed, said Mr Yong.

The FTSE ST Oil & Gas Index was the worst-performing sector on the Singapore Exchange yesterday, falling 3.37 per cent.

Keppel Corp slipped 4.26 per cent, or 37 cents, to $8.32 while Sembcorp Industries dropped 2.55 per cent, or 11 cents, to $4.21. Sembcorp Marine was down 3.7 per cent, or 12 cents, to $3.13.

Tumbling oil prices coming amid a surplus of new rig deliveries may spell difficult times ahead for offshore drilling companies, Moody's added.

Low oil prices will put intense pressure on day rates, or the amount a drilling contractor gets paid by the oil company for a day of operating a drilling rig this year.

But 2016 could prove even more painful for the many companies that will have to renew contracts on existing rigs at significantly lower rates, Moody's said.

Oil majors will fare better, it added.

"Integrated oil companies have been more measured in their response to falling oil prices, typically making investment decisions assuming prices of no more than US$50 to US$60 a barrel, since projects can take years to complete.

"Still, some companies - ExxonMobil, Royal Dutch Shell and Total - have announced spending reductions for 2015, while cuts at others, including Chevron and BP, look likely."

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