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Oil price at US$80 may be the grease for an O&M recovery

The Business Times by TAN HWEE HWEE

Singapore

THE rise in Brent Oil to above US$80 a barrel since late September has fanned expectations that the beleaguered offshore and marine (O&M) sector is seeing light at the end of the tunnel.

But the rising tide will not lift all boats and investors should look to several pointers flagged up by industry analysts ahead of the upcoming financial reporting season.

For a start, look upstream where sustained, higher oil prices directly benefit exploration and production (E&P) players, the so-called top-feeders in the O&M value chain.

Last week, oil major BP indicated it would raise its planning oil price to US$60-65 this year, up from US$50-55 previously. Based on this scenario, BP is likely to sanction more oil field projects. This is likely to be the case for the other oil majors.

Rystad Energy's head of oilfield services research, Audun Martinsen noted that capital expenditure in new offshore oil and gas (O&G) projects would continue to expand in 2018 and beyond after having booked an increase last year, its first since 2014 (see bar chart).

The general consensus is oil will hold above US$70 in the coming months, which will provide a comfortable threshold for oil majors to expand their offshore capital expenditure. Wood Mackenzie's research director, Sushant Gupta cited three factors for oil price to remain firm, at least until the first quarter of 2019: a shortfall arising from US sanctions on Iran, Venezuela's crisis and pipeline bottlenecks hindering US shale exports.

This spells good news for O&M players, which have long counted on offshore O&G contracting activity for the bulk of their revenue.

On the flipside, the rig and offshore support vessels (OSVs) sectors remain challenging as rates are still hovering at half or less than half of their peak levels. As such, yards can no longer count on a rebound in newbuilding activity anytime soon although they can look forward to several upsides from increasing O&M contracting activity.

Firstly, some owners including Borr Drilling and Swire Pacific are starting to reactivate their idle rigs or OSVs. And with over a dozen jack-ups being warm- and cold-stacked off South-east Asia, leading rig-builders, Sembcorp Marine and Keppel O&M, are in a good position to land some of the reactivation work, according to IHS Markit's APAC head of research Ang Dingli. The costs of reactivating rigs can go up to tens of millions of dollars. For OSVs, the costs can run into hundreds of thousands of dollars.

Secondly, the oil price recovery will help yard groups to offload their inventory of unsold newbuilds. Keppel O&M, for example, still has more than half a dozen jack-ups that are still awaiting delivery to rig owners aside from those that have been re-sold to Borr Drilling, according to some analysts' estimates.

Ian Craven of Icarus Consulting identified six rigs - three placed by Fecon, two by Grupo R and one by Clearwater Capital - as likely candidates for a resale. He added that Borr Drilling is rumoured to be eyeing two more Grupo R units after concluding in May the US$745 million acquisition of five jack-ups then being built at Keppel Fels for third-party owners.

While rig-building is not expected to return to its heydays anytime soon, a slew of liquefied natural gas (LNG) projects are finally entering the tender pipeline after years of delay. This development portends well for the yards' order books.

Shell has taken the lead in sanctioning the mega LNG Canada project, with the award of a US$14 billion engineering, procurement and construction (EPC) contract. WoodMac's research director Nicholas Browne described 2019 as potentially "the biggest year ever in terms of tonnes of LNG that would move to final investment decision".

If his prediction pans out, more billion-dollar EPC contracts could well be dished out soon.

While most of these projects are located onshore, Asian yards may still be able to get a piece of the action in fabrication work on modularised structures. IHS Markit's lead analyst Jessica Goh suggested that the winner of Shell LNG Canada EPC contract is likely to tap capacity in East Asia first but given the scale of the mega project, some spillovers to South-east Asia cannot be ruled out.

Ms Goh said yard groups like SembMarine and Dyna-Mac may improve their chances of getting involved in large-scale projects by teaming up with selected contractors ahead of the tender.

Some market watchers speculated that Keppel O&M could tie up with Golar LNG to bid for the construction of BP's Tortue floating LNG.

But others noted that Golar may be more inclined towards China for its projects. One factor favouring Chinese yards is their access to cheap state-backed project financing, which can help project owners defray costs. In the coming months, market watchers will be keenly looking out for indications on whether yard groups here can successfully overcome the stiff competition from their Chinese rivals.