Singapore Oil Services Companies Downsizing On Weak Crude Prices

Singapore Oil Services Companies Downsizing On Weak Crude Prices

$OIL, $DB

While the share prices of many Singapore Oil service companies have risen in tandem with the broader market on optimism that US Fed will not hike its interest rate this year, analysts said the sector still faces significant headwinds ahead and any meaningful recovery may emerge only after next year.

As of last week, given that prices of benchmark Brent Crude dropped by more than 50% from June last year, to below 49 bbl last Friday.

Analysts were still skeptical about the outlook of the local oil service sector turning better. Deutsche Bank Markets Research expected new orders for the Singapore offshore and marine sector to stay weak despite firmer Crude Oil prices recently.

Any offshore contracts which are up for grabs are likely to attract aggressive bidders, and hence drive down prices and margins, Deutsche Bank said.

While the German bank forecasts Brent Crude to trade higher to 57 in Y 2016 and 63 bbl in Y 2017, the international offshore drillers and Oil companies are likely to remain cautious about their capital expenditure plans well into next year, given the significant rig oversupply situation, which does not bode well for the Singapore oil service providers.

CIMB Research also said the net debt-to-equity ratio of the local Oil services companies have increased amid business slowdowns and stock price slumps. To ease debt pressures, CIMB understood that some companies are negotiating with the banks to allow them to service only the interest portion of their amortizing loans in the interim. Some are seeking refinancing via loan top-ups, as they had paid off a portion of the principal over the past years.

Meanwhile, some are also negotiating for an amendment of financial covenants. In addition, most Singapore Oil services companies are laying up their fleets, right-sizing headcount, and controlling selling and general and administrative expenses tightly, in order to stave off the impact of depressed Crude Oil prices.

More desperate measures include hiring freezes, not replacing employee attrition, cutting salaries, reducing onshore and offshore crew as well as consolidating functional teams.

With these measures in place, and having witnessed how the local Oil service sector has withstood the cold chill over the past 1.5 years, CIMB concluded that although credit risks are heightened for some of the companies in the sector, there is no material rise in risk of cash calls or insolvency.

The likelihood of a”Lehman Moment” and the resultant threat of contagion and credit freeze for the sector is low.

While CIMB had on average cumulatively slashed forecasts for Oil service companies’ F-Y 2015 and Y 2016 EPS by 29% to 38% since January 2015, it believed that most of them are still able to comfortably service their interest payments, and have enough cash on hand to meet their short-term debts.

CIMB does not expect a strong rebound for the sector in Y 2016, and advised investors to focus on tendering activities to discern the sector’s shifts. More tenders and inquiries mean the prospect for more work which, in turn, means a positive revision in offshore fleets’ utilization and day rates expectations.

by Tan Shih Ming

Paul Ebeling, Editor

HeffX-LTN

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