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Provisions offer clue to oil & gas sector turning the corner

Singapore

MARKETS were taken by surprise early last week when DBS Group Holdings unveiled a decisive move to clean up its exposure to troubled borrowers in the oil-and-gas sector.

The bank nearly doubled its provisions for bad debts to S$815 million as it classified residual weak oil-and-gas support services exposures as non-performing assets, and booked, as a result, an unexpected 23 per cent drop in third-quarter earnings.

Such a move will lower the downside risks for the largest lender in South-east Asia, which has said it is unlikely to take more such allowances.

But it has also revived the question: Is the worst in the oil-and-gas downturn really over?

Industry observers view the hefty provisions taken by DBS as a positive step forward for offshore and marine players here, which have been left battered and bruised by the downturn. After all, a crucial step to recovery is successful restructuring - a process that includes the lenders.

Pareto Securities chief executive David Palmer noted that offshore and marine companies here have been trying to hang on and restructure their debts amid a "credit void" that has unfortunately crushed the value of offshore equipment.

"But buyers are returning, albeit at low levels. Companies are learning that transparency and honesty in restructuring situations is crucial to creating a solution. It now seems the banks are ready to play their part and new equity is being found," he told The Business Times.

"That DBS is making these provisions is essential in finding consensual restructuring solutions."

Adding to that, the broader signs for a much-needed recovery in the sector have also been moving steadily into place, even if very slowly. Prices of global benchmark Brent stood at around US$63 a barrel as at Monday - markedly improved from the lows of US$29 seen in early 2016.

The turnaround in the industry is also backed by the fact that oil companies are cashflow-positive at US$50 a barrel, as they resume spending and exploration activities, said Mr Palmer. "We are at least 12 months away from rate increases, but we are seeing increased enquiry in the rig-and-offshore support vessel markets.

"Utilisation is picking up. The oversupply situation is not as crippling as it would feel. Many older vessels are simply rotting away in situ and many more will never return to the frontline. We are much closer to a recovery than some people would think."

Mr Joel Ng, analyst at KGI Securities Singapore, said the act of cleaning up within the companies themselves is helping as well. "The oil-and-gas industry is also taking provisions or write-downs, which is positive. We are starting to see equity investors come back into the sector after the oil-and-gas companies have cleaned their books."

Last week, The Business Times reported that nine prominent business people - including those behind household names Super Group, Soilbuild, Goldbell and Yanlord - have pooled together S$60 million in rescue financing for debt-laden Marco Polo Marine. The proposals tabled for the group of companies are pleading for 69 per cent, 71 per cent and 95 per cent debt forgiveness from its bank lenders, noteholders and for its contingent liabilities, respectively.

But an air of uncertainty remains. The S$60 million equity injection, for one thing, represents just a fraction of the S$258 million of debts that Marco Polo has racked up.

UOB Kay Hian analyst Foo Zhi Wei said: "The steps taken to restructure the company seem to be in the right direction, if only to give them a very long runway.

"But take a look at Marco Polo's fleet, which is mostly idle: Most of the S$60 million will disappear into re-activation costs for fresh work, if they even get any. It is also probably too little to buy distressed assets that could improve the fleet's competitiveness."

To be fair, the offshore and marine sector, as a whole, has not performed too badly in the latest earnings season, considering the bloodletting that happened earlier.

Keppel Offshore & Marine broke even in the third quarter on the back of contributions from associates and right-sizing efforts; Sembcorp Marine swung into the black with a S$2.7 million net profit, from a net loss of S$21.8 million in the year before.

Smaller firms such as Vallianz Holdings saw earnings skyrocket 400 per cent to US$5.3 million on higher operating profits, and Pacific Radiance and Pacc Offshore Services Holdings managed to pare losses.

Others, however, remained under acute stress. Ezion Holdings sank into the red with a net loss of US$13.7 million, compared with a net profit of US$9.4 million previously; it has warned it is assessing the amount of impairment losses on its assets.

CIMB head of Singapore research Lim Siew Khee is less sanguine on the sector's overall performance. "For the big caps, the lacklustre results today should not be a surprise, given the weak orders in the past two years. And the small caps are still not showing any noteworthy results.

"We think utilisation of assets and earnings may start to show only in the second half of 2018 or early 2019."

The worst of the battering in the offshore-and-marine sector may be over - in particular the massive fallouts from Swiber Holdings and Ezra Holdings - but the road to a full-fledged recovery remains a long way out.

KGI's Mr Ng said: "There are still many highly-leveraged oil-and-gas companies that find it challenging as their capital structure is simply unsustainable. Many small- to mid-cap oil-and-gas companies will need to restructure their balance sheets in order to survive, which will mean dilution to existing shareholders."

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