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Turbulence lingers for Singapore's debt-heavy offshore firms

More loans may turn sour, stressing banks

Part of an offshore drilling platform, right, at Singapore port   © Reuters

SINGAPORE (Nikkei Markets) -- Despite steadying crude oil prices, recent developments in Singapore's multi-billion-dollar offshore and marine industry point to a rocky year ahead for companies and little relief for the banks that lend to the sector.

The latest warning came from CH Offshore, an operator of vessels used by the offshore oil industry. In its annual report released Monday, the company said that weaker-than-expected demand for oil and rising U.S. shale output continue to crimp offshore exploration and production.

Last week, Triyard Holdings suspended trading in its shares following demand letters from two creditors. Triyard provides engineering, fabrication and ship construction services and its principal bankers include Singapore lenders DBS Group Holdings and Oversea-Chinese Banking Corp, according to media reports.

Several other firms are trying to restructure their debts, indicating banks could struggle with problem loans to the sector in coming months.

In its annual report for the financial year ended June 2017, which was posted on the Singapore Exchange on Monday, CH Offshore's executive chairman Tan Pong Tyea said that while the agreement late last year among OPEC members to cut oil production has lifted the commodity's prices, the increase has been crimped by weak demand and the rise in U.S. shale oil output.

"The ease with which shale oil wells can be revived for production when prices rise adds to the clouded outlook for oil prices in the year ahead," he said, adding that any rebound in offshore oil and gas activity would be muted as such projects must now compete for capital with lower-cost onshore projects.

However, Tan also said there were indications that the worst may be over for the offshore industry, with crude oil prices having likely seen their lows for the current cycle.

"With the rebalancing of costs across the offshore oil and gas industry, new offshore oil and gas development is becoming profitable again, even at current oil prices."

Other views, including that of Singapore banks, hold that oil prices need to be much higher - possibly around $70 per barrel - before demand for offshore services can return to levels where firms can hope to make a decent profit.

Prices for Brent crude, the international benchmark, are currently hovering around $50 per barrel, much higher than the $30-plus levels a year ago but still well below the range before prices started tumbling in mid-2014.

CH Offshore posted a net loss of $40.1 million for the 12 months ended June 2017, reversing from the previous financial year's net profit of $5.6 million as it made impairment charges and accounted for doubtful debt.

Singapore is one of the largest manufacturers of high-specification oil rigs and other specialized vessels used by the global oil and gas industry. Besides Keppel Corp and Sembcorp Marine, the world's two largest offshore rig builders, the city-state is also home to hundreds of companies that provide services such as ship chartering and repair for the oil industry.

According to government agency Spring Singapore, the offshore and marine industry's output totaled some 19.5 billion Singapore dollars ($14.5 billion) in 2015, down from S$24.9 billion in 2014. Spring's website did not provide figures for 2016.

CH Offshore's warning coincides with an analyst report on Sunday that said many companies in Singapore's oil, gas, and marine sectors have high debt levels relative to earnings, meaning banks will likely have to classify more loans as nonperforming in coming months.

Daniel Tabbush, who publishes his research on Smartkarma, an investment research portal, also said new accounting guidelines that will take effect on 1 January would force banks to disclose expected credit losses at each reporting period instead of waiting for a specific event as is currently the practice.

By the end of the second quarter of this year, Singapore's three banks reported S$10.9 billion in total non-performing loans, he wrote. "There remains reasonable risk of figures ratcheting higher...These total debt figures should also be considered against banks' S$8.8 billion of past due loans that are not impaired," he added.

Besides Triyard, other Singapore-listed firms that are in the midst of restructuring include Emas Offshore and Marco Polo Marine.

Emas Offshore, whose businesses include providing offshore support and accommodation vessels to customers in the offshore oil and gas industry, recently received $50 million in new equity financing commitments. Marco Polo Marine, which also provides specialized vessels to oil companies, has proposed a restructuring plan that involves writing off some of its debt along with an injection of around S$60 million in new equity.

Nam Cheong, a Malaysia-based ship builder listed in Singapore, is also trying to calm creditors by selling an office property in Singapore and promising that its majority shareholder would inject new funds into the company.

The company's shares have been suspended since late July when it ceased repayments on its loans.

--Kevin Lim

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