A Bloomberg analyst pointed out that the recent share market rally in Singapore was underpinned by stocks of ship and oil rig-makers, despite the sectors’ fundamentals being weak. The rally, he concluded, was floating on a bit of foam.
Since the crash of oil prices in late 2014, the Singapore offshore services and engineering industry has been hit hard. Anticipating that the good times would continue – always a fallacy – all the capital expenditure and debt incurred from oil’s boom over 2009-2014 came back to haunt the sector after upstream work dried up in the past two years.
Singapore, being the nexus of much of the rig-building, offshore vessel and mechanical engineering contracting in Asia, has been hit the hardest. It came with a delay; the hope was that oil prices recover in 2016 after plunging in early 2015, but that never came. So when Swiber Holdings declared bankruptcy last August, it was a surprise to no one in the industry. In such a downturn, there are always casualties, and other companies – Swissco, Ezion Holdings, KrisEnergy – were also facing critical times. Debt holders of these companies, mainly Singapore banks, had to take a haircut. In response, the financial industry tightened up its portfolios while the Singapore government pledged to aid the industry, but stopped short to bailing the companies out.
The saga continued last week. Industry darling Ezra Holdings – once worth US$2 billion – filed for Chapter 11 bankruptcy in the USA. The international filing is unusual, but it does offer legal and enforcement action protection worldwide, as it attempts to restructure. Also declaring Chapter 11 are related entities Ezra Marine Services and EMAS IT Solution, and possibly also circling the drain is Ezra Holdings’ debt-ridden subsidiary Emas Chiyoda Subsea, which owes the former some US$170 million. Ezra Holdings’ last published earnings declared losses of US$339.6 million, with US$1.51 billion of liabilities. Court filings show that its 20 largest creditors are owed some US$600 million; one – Norwegian shipowner Forland Subsea AS – has agreed not to pursue to repayment of a defaulted charter payment, but the rest are not being so patient.
As Ezra Holdings battles to survive, new concerns over the health of the industry have been cast. Though some argue that Ezra was poorly managed and over leveraged to begin with, it may not be reflective of all other players in the industry. However, investors seem sanguine for now. The banks, for example, have already identified Ezra as a threat, with DBS moving its US$270 debt owed to ‘non-performing’ while OCBC has been stress-testing the sector since Q32015. The financial industry, by and large, has already reduced its exposure to this murky pool, but turbulence beneath the surface still threatens the industry itself. Analysts and auditors are already looking for the next trouble – with Malaysian vessel builder Nam Cheong, Singapore’s Loyz Energy and Rickmers Maritime named as potential threats. Yet, there are those that are hunting for a bargain – British engineering specialists Subsea 7 has expressed interest in purchasing Ezra Holdings assets, as well as those of its embattled joint venture Emas Chiyoda Subsea.
With oil prices having recovered somewhat, the forecast might be brighter, but brace yourself, there are still squalls to come as the upstream industry further consolidates and reinvents itself. Oil companies are putting a lot more cost pressure across their supply chain, and offshore marine contractors are not excluded from this picture. Previous charters rates will certainly not re-appear in the medium terms at least hence the business model of vessel owners will need serious tweaking. Those willing innovate and put their re-engineering skills to use, may look at diversifying their business into offshore renewable energy and other seabed mining sectors.
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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