The story of Swiber has been swirling around Singapore for the past few weeks. In the words of DBS Group Holdings chief executive Piyush Gupta, ‘Swiber Holdings imploded in six weeks.’ Once a respected Singapore-based supplier on offshore oil and gas projects, the company has now been placed under judicial management to restore it to some modicum of financial health. It isn’t an isolated incident, but symptomatic of challenges facing the wider industry as it faces a new enemy: debt.
Debt itself isn’t malignant. Most businesses fund their ventures and projects with debt, provided by financial institutions betting that they will be paid back with interest. The issue is that the collapse in oil prices from highs of nearly US$150/b to sub-US$50/b levels that magnified the issue. Oil majors, who have sources of revenue from selling crude to refining products to clean energy ventures, can weather it out. Collectively, the four major oil giants – ExxonMobil, Shell, BP and Chevron – have seen their debt double to nearly US$138 billion since the crash two years ago. But liquid cash flow and ultra-low interest rates mean they can ride out the storm, and even afford to take on more debt, as financials institutions aren’t worried they’ll go belly-up. What they have done, however, is slash capital expenditure to only the most promising projects. And that has reduced the gravy train to service companies to a drip feed.
Swiber has an order book of US$1.2 billion, but that alone isn’t enough. Its US$710 million oilfield project in west Africa, for which it was to provide construction services, was delayed in July; one of only many delays likely as clients slash investment. Defaulting on a financial coupon payment last week, confidence in the company crashed on fears that it would not be able to pay its debts – which includes almost S$700 million to DBS, with less than half secured against collaterals, and more owed to other Singapore banks OCBC and UOB. In response, DBS reported that its profits for Q2 fell by 6%, taking into account bad debts from Swiber.
Swiber might completed implode, but the danger is that it will drag others with it. The Singaporean banking industry’s outstanding loans to the oil and gas industry runs into tens of billions – UOB alone has exposure of $9.3 billion at the end of June, and some US$1.2 billion in bonds is set to mature at the end of 2017. The debts are from Swiber and its competitors, some of which – Technics Oil and Gas, Swissco Holdings, Ezion Holdings, Ezra Holdings and Marco Polo Marine – are immediate concerns, with their high net-debt-to-equity ratio. Having borrowed too much in anticipation of a continued boom, the fall in oil prices have turned dreams into nightmares. There is not much that can be done, beyond a hope of a miraculous turn around in oil prices. The next few months will be painful for all concerned. Out of the wreckage will come consolidation – only the strong will survive – but the path there is fraught with danger, not just for offshore service industry in Singapore, but also their lenders.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell