Oil price drop felt by many firms here

HIT: Keppel Corporation (above) and Sembcorp Marine are part of an ecosystem built around Singapore's energy industry. Then there are the smaller rig builders and those providing offshore services. FILE PHOTO: BLOOMBERG


    Dec 08, 2014

    Oil price drop felt by many firms here

    THE adage that too much of a good thing can hurt just as much as too little was brought home starkly last week when stock prices tumbled in tandem with a plunge in crude oil prices.

    With the exception of oil producers, falling crude prices is regarded as good for a country's economy.

    In Singapore, rising prices of oil and other commodities have contributed to higher-than-normal inflation in the last few years. As recently as a few months ago, motorists were still grappling with regular hikes in pump prices, which some retailers have blamed for raising the prices of their wares and produce.

    Now that the price of Brent crude has fallen 40 per cent to just under US$70 per barrel from US$115 in June, surely this is good news for consumers, businesses and investors?

    So why did the stock market take a knock last Monday, with the Straits Times Index tumbling 45 points after crude prices fell sharply on news that oil cartel Organisation of Petroleum Exporting Countries had decided not to cut its output despite a global oil glut?

    There are two possible reasons.

    First, investors generally dislike market dislocations, such as when asset prices rise or fall steeply over a short period.

    To be sure, there are winners and losers whenever currencies or commodities move in a certain direction. But violent movements in an underlying asset are rarely welcomed by businesses and investors.

    For businesses, projections of profits can easily turn into losses if a key component stipulated in a contract loses 40 per cent of its value in six months.

    Similarly, an equity fund may be forced to trim its entire portfolio to stay within its mandate if that portfolio takes a significant hit from a selldown of oil-related stocks in its holdings.

    Second, Singapore has established itself as a regional energy hub, despite producing no oil or gas of its own.

    There is an entire ecosystem built around it, including an equity marketplace that welcomes and values energy and related companies.

    Offshore rigbuilders Keppel Corporation and Sembcorp Marine are prime examples of oil and gas plays, but there are many smaller rig builders and those that provide offshore services - like Ezion Holdings, Ezra Holdings, Pacific Radiance and CH Offshore - which have thrived on a Singapore listing.

    Even foreign companies like Mermaid Maritime Public Co, Nam Cheong Group, Noble Group and PACC Offshore Services Holdings have made it a point to list on the Singapore Exchange (SGX).

    Consequently, the casualty list of stocks on the local exchange hit by the oil price plunge is a rather long one, as they also include commodity plays like Wilmar International, Olam International and Golden-Agri Resources.

    Sentiment aside, companies in the oil and gas segment are facing a very real prospect of losing business over an imminent slowdown in oil exploration and production. At the current crude price levels, it is uneconomical to extract oil from the less efficient oil fields.

    Mermaid and ASL Marine Holdings appeared to be early casualties.

    In an announcement on Saturday, Mermaid said it had received early termination of a contract from an international upstream oil and gas client for a drilling rig.

    The initial term of the contract was set to end in May next year, but the rig is now scheduled to be demobilised by the end of this month, owing to delays by the client in obtaining new permits from the authorities in Indonesia for the rig to continue operating.

    The company, however, insisted that the rig's ability to operate in shallow water production fields remains a draw for national oil and gas companies in the region.

    "Potential clients have already been identified and we have commenced discussions with them," said Mermaid chief executive Chalermchai Mahagitsiri.

    On the same day, ASL Marine disclosed that a client had backed out from taking delivery of two offshore support vessels that ASL Marine is building.

    One of the vessels will be ready for operations in the first quarter of next year while the other vessel can start operating in the third quarter.

    ASL Marine said it is confident that there is demand for the vessels and has commenced discussions with potential buyers or charterers.

    Analysts do not expect any meaningful rebound in the share prices of companies in the oil and gas sector.

    The fear is that the deal cancellations announced on Saturday are just the tip of the iceberg.

    For the risk-averse investor who, nonetheless, wants a piece of the stock market action this week, there is the initial public offering (IPO) of Keppel DC Reit to look forward to.

    Touted as Asia's first pure-play data centre real estate investment trust, the IPO boasts a distribution yield of 6.8 per cent for the next financial year and 7.1 per cent in 2016.

    The IPO is allocating for public subscription a decent size of 53.8 million shares at 93 cents apiece. In other words, there is a very good chance of getting your hands on the shares. The offer closes on Wednesday.