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Nikkei Markets

Singapore offshore firms recover to confront new threats    

Outlook remains cautious, with renewables and shale adding to uncertainty

Sembcorp employees look at the modules on the main deck of Tullow Oil's newly completed Floating Production, Storage and Offloading vessel in Singapore.   © Reuters

SINGAPORE (Nikkei Markets) -- Singapore’s large offshore and marine industry is showing signs of confidence as sales improve for some companies and acquisitions pick up pace. However, caution prevails about the outlook, given the intense competition and the uncertainty about the direction of oil prices as well as the global economy.

    The city-state’s rig builders and oil and gas services companies also face long-term challenges. Even as more consumers are switching from fossil fuels to alternatives, U.S. shale oil, a non-petroleum form of fuel, is eating into the market share of offshore producers.

   Singapore, a major oil and gas trading center, is home to Keppel Corp and Sembcorp Marine, the world’s two largest makers of offshore rigs. The island also serves as the regional headquarters for oil majors like Royal Dutch Shell and ExxonMobil as well as smaller players that lease out specialized vessels and repair and maintain equipment used in exploration and production.

   The industry has been in the doldrums since 2014 when crude oil prices plunged from over $110 per barrel to below $30 at one stage. Brent oil has since recovered to around the $65 level, and most companies have begun reporting higher revenues and orders.

   In its 2018 annual report published earlier this week, Keppel Corp said there were early signs of improvement in the offshore rig sector as well as increasing demand for floating production storage and offloading, or FPSO, vessels.

   Keppel chairman Lee Boon Yang referred to growing optimism in the offshore and marine business, although he said it would take some time to see a sustained across-the-board recovery.

   Sembcorp Marine, the number two rig builder, was more circumspect about the outlook, noting that oil prices remained volatile and that the recovery over the past year was in large part due to production cuts by members of the Organization of the Petroleum Exporting Countries and Russia.

   The factors that will drive oil prices this year include “the overall high global output, particularly from the U.S., market concerns about the future drop in demand from a slowdown in global economic growth, and geopolitics,” Sembcorp Marine said in its annual report.

   While the overall industry outlook is brightening, it would take significant time and effort working with potential customers before the company secures new orders, it said. “We also expect competition to remain intense,” it added.

   Keppel and Sembcorp Marine both reported higher revenue for 2018. Keppel also secured 1.7 billion Singapore dollars ($1.26 billion) in new contracts last year, a sharp increase from S$1.2 billion in 2017 but still way below the S$7 billion to S$8 billion a year achieved before the crash in oil prices.

   By contrast, Sembcorp Marine saw new orders fall to S$1.18 billion last year from S$2.74 billion in 2017.

   Elsewhere, PACC Offshore Services Holdings, or POSH, one of the world’s largest suppliers of support vessels for oil and gas industry, said that while it managed to grow revenue by 56% to $299.4 million and turn in an operating profit last year, prospects remain unclear amid uncertain macroeconomic conditions.

   The nascent recovery in the industry has prompted stronger players to invest in their weaker rivals, signalling consolidation. Malaysia’s Yinson Holdings earlier this week offered to inject $200 million in debt-ridden Singapore lift boat operator Ezion Holdings, while New York-listed Seaspan Corp last week said it will invest up to $200 million in Singapore marine engineering group Swiber Holdings.

   Hou Wey Fook, chief investment officer for consumer banking and wealth management at DBS Group, said any recovery in the oil services industry would be constrained by structural changes.

   In the past, swing producers such as Saudi Arabia and Russia could drive oil prices higher by adjusting production. Their influence has waned, however, as U.S. shale oil producers have overtaken both countries in terms of daily output.

   Oil services companies need oil prices to be sustained at a high level for capital expenditure to return, he added.

   “The long-term headwind is the fact that the world is using less fossil fuels. There is alternative energy (and) there are fewer people buying cars because of the sharing economy,” he said.

   Motor vehicles account for about 30% of global oil consumption.

-- Kevin Lim

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