• Where are you in the value chain?
• Bank support critical
• Risk of “amend and extend” for bonds

Market speculation to support oil prices for now

OPEC members are meeting major exporting non-OPEC countries at the International Energy Forum in Algeria from 26-28 Sep to discuss the oil market situation, including any possible action that may be required to stabilize the market. At present, while many market watchers are expecting a low possibility of curtailed output by OPEC, we expect market speculation to continue till the end of Sep. We believe this would deter short-selling in oil, offering some support for oil prices.

When you recover depends on where you are in the value chain

However, beyond this, times remain tough for fabricators, asset owners and service providers along the oil and gas value chain, though with varying degrees of stress. The newbuilding spree in the last few years for rigs and offshore support vessels, supported by favourable payment terms, have resulted in a significant oversupply of assets. Order flow has dwindled and is likely to remain so until oil prices show signs of a sustained recovery. Confidence has to come back to oil and gas companies first, who will then award projects, benefiting companies lower down the value chain. The asset owners first need to see an uptick in demand first before they are willing to place orders with the fabricators.

Still hanging on

So far, owners or lenders who will sell for desperate consideration are still rare, and it is difficult for buyers to justify paying more than a token price for an asset – however promising its long-term potential – which could be sitting idle for an indeterminable period and consuming cash in the meantime. On the other hand, unless forced by lenders, owners are reluctant to sell, and lenders are loath to liquidate loans at fractions below par. Under such circumstances, transactions are likely to involve equity consideration, or equity-like securities such as warrants or convertibles, or transfer of debt, rather than pure cash considerations.

Risk of “amend and extend” for bonds

Meanwhile, we have seen some investor interest in the bonds of companies vs. their equity, but we caution that a lot depends on banks' willingness to support, and investors will likely need to hold the bonds till maturity, besides the risk of “amend and extend” prior to maturity. Local banks currently still seem keen to support the sector, and we would look out for companies with heavy reliance on foreign banks. In this report, we also do a quick stock take of companies' financial positions and debt servicing abilities. Maintain NEUTRAL on the broader sector given the dim outlook and depressed valuations.  

Source: OCBC Research - 25 Aug 2016