Oil price has climbed from a low of $30 per barrel early this year
to $40 now. It is a more than 30% rise and share prices of Keppel Corp and
Sembcorp have climbed in quite a similar fashion.
to $40 now. It is a more than 30% rise and share prices of Keppel Corp and
Sembcorp have climbed in quite a similar fashion.
So the questions really are:
“Has oil price bottomed out? Is now the right time to dive into
Oil and Gas shares?
Oil and Gas shares?
Bad
sentiments – good time for entry?
sentiments – good time for entry?
I was in Kuala Lumpur this week to visit clients and also to
attend the bi-annual Offshore Technology Centre “OTC” exhibition. The
exhibition is buzzing with more than 15,000 delegates and trade visitors and
close to 18,000 registrants from over 80 countries. For me, I met so many
familiar faces from the industry as well as new faces as young as fresh
graduates. It was great!
attend the bi-annual Offshore Technology Centre “OTC” exhibition. The
exhibition is buzzing with more than 15,000 delegates and trade visitors and
close to 18,000 registrants from over 80 countries. For me, I met so many
familiar faces from the industry as well as new faces as young as fresh
graduates. It was great!
Many mentioned that the exhibition was so busy because people just
do not have much work to do. Others said that this is best time for people who
already sense that they are on the brink of losing their jobs to bring along
their CVs and distribute to potential employers.
do not have much work to do. Others said that this is best time for people who
already sense that they are on the brink of losing their jobs to bring along
their CVs and distribute to potential employers.
Needless to say, everyone commented that O&G business is very
bad! This is in contrast to one year ago when many are still feeling a bit of
indifferent and hopeful despite that oil price already began the plunge in
3Q2014.
bad! This is in contrast to one year ago when many are still feeling a bit of
indifferent and hopeful despite that oil price already began the plunge in
3Q2014.
So…when sentiments are already this bad, meaning a sign of entry
to O&G stocks? In contrast, when everybody is talking how good the industry
is, typically it is the time to sell!
to O&G stocks? In contrast, when everybody is talking how good the industry
is, typically it is the time to sell!
From the
horse mouth
horse mouth
From Keppel, I heard
that business is bad but they are actively diversifying into other sectors for
the long term. How about the share price I asked. A Keppel staff who had been
in the in the company for more than a decade said, it is unlikely that for a
long time that share price will go back to the hay days of above $10! As for
jobs retrenchments, I have not heard anyone I know in Keppel who is retrenched.
I was told that till now, axing is mostly laid on contract staffs and most
overseas staffs.
that business is bad but they are actively diversifying into other sectors for
the long term. How about the share price I asked. A Keppel staff who had been
in the in the company for more than a decade said, it is unlikely that for a
long time that share price will go back to the hay days of above $10! As for
jobs retrenchments, I have not heard anyone I know in Keppel who is retrenched.
I was told that till now, axing is mostly laid on contract staffs and most
overseas staffs.
Earlier this month, Petronas also announced restructuring that will
affect under 1,000 jobs. Malaysian Prime Minister Najib who also attended the
inaugural OTC show and added some confidence saying that Petronas is still very
strong and going to do well. Refer to article here. Yet, I
heard from rumours that Petronas is actually slashing more jobs than the media
has reported in order to protect the state-owned company’s image.
affect under 1,000 jobs. Malaysian Prime Minister Najib who also attended the
inaugural OTC show and added some confidence saying that Petronas is still very
strong and going to do well. Refer to article here. Yet, I
heard from rumours that Petronas is actually slashing more jobs than the media
has reported in order to protect the state-owned company’s image.
Far away in Brazil and Mexico, Petrobras and PEMEX respectively are also still in
situation of disarray with billions of losses announced coupled with massive
debts! Many suppliers claimed that they already stopped receiving payments from
these oil majors. While it appears that there is some good news that PEMEX has
a new CEO lately and promise to reorganize and start clearing bills, it will
normally take a while for a new chief to settle down and exert his influence.
situation of disarray with billions of losses announced coupled with massive
debts! Many suppliers claimed that they already stopped receiving payments from
these oil majors. While it appears that there is some good news that PEMEX has
a new CEO lately and promise to reorganize and start clearing bills, it will
normally take a while for a new chief to settle down and exert his influence.
For major EPC contractors, such as Malaysia listed Sapurakencana and Bumi Armada,
International players such as Technip, Saipem, Subsea 7, McDermott etc, backlog orders are drying up.
International players such as Technip, Saipem, Subsea 7, McDermott etc, backlog orders are drying up.
What I heard is for most of these companies, contract staffs are
hearing no confirmation of contracts extension. Even many permanent staffs are
unsure of their employment future!
Morale is low, but still busy with work though as of now.
hearing no confirmation of contracts extension. Even many permanent staffs are
unsure of their employment future!
Morale is low, but still busy with work though as of now.
Malaysia’s Bumi
Armada, Keppel’s client for FPSO conversion projects isn’t doing that good.
Bumi is embroiled in a legal suit with Australian Woodside’s Petroleum
subsidiary company for the termination of her FPSO contract. To offset the bad
news, Bumi had recently appointed a new CEO having without a permanent one
already for more than a year now. SapuraKencana is said to have many offshore
construction and pipelay vessels with no firm jobs next year.
Armada, Keppel’s client for FPSO conversion projects isn’t doing that good.
Bumi is embroiled in a legal suit with Australian Woodside’s Petroleum
subsidiary company for the termination of her FPSO contract. To offset the bad
news, Bumi had recently appointed a new CEO having without a permanent one
already for more than a year now. SapuraKencana is said to have many offshore
construction and pipelay vessels with no firm jobs next year.
The common term of warm stacked is used, meaning vessels being lay
up with no jobs and with few crews onboard.
up with no jobs and with few crews onboard.
Singapore listed Swiber are still having lots of backlog jobs
particularly in India, and anticipating more to comes! Nonetheless it was
rumoured from the industry that these jobs were awarded at an extremely low
price with marginal or no profits? Despite the huge number of jobs for Swiber,
the thorny problem is the huge debt problem she is facing and staffs being
overloaded with duties leading to inefficiency.
particularly in India, and anticipating more to comes! Nonetheless it was
rumoured from the industry that these jobs were awarded at an extremely low
price with marginal or no profits? Despite the huge number of jobs for Swiber,
the thorny problem is the huge debt problem she is facing and staffs being
overloaded with duties leading to inefficiency.
Likewise Ezra/EMAS is also seeing jobs but she too, is
struggling with high leverage problems having to repay massive debts. EMAS had
already let go many expat staffs and are aggressively cutting cost. However, it
seems like they had possibly received a lifeline when Japanese company Chioyada
bought a stake into the company.
struggling with high leverage problems having to repay massive debts. EMAS had
already let go many expat staffs and are aggressively cutting cost. However, it
seems like they had possibly received a lifeline when Japanese company Chioyada
bought a stake into the company.
If Oil companies and EPC contractors are doing badly, indirectly
it means that OSV companies who depend on the former for jobs, will fared badly
if not worst! OSV companies in Singapore includes the likes of Pacific Radiance, Nam Cheong, Marco Polo, POSH, Falcon Energy etc will all still be facing some tough
times ahead.
it means that OSV companies who depend on the former for jobs, will fared badly
if not worst! OSV companies in Singapore includes the likes of Pacific Radiance, Nam Cheong, Marco Polo, POSH, Falcon Energy etc will all still be facing some tough
times ahead.
Not good for
Singapore
Singapore
More worrying for Singapore is McDermott, Subsea 7 and Technip who used to have sizeable
operations in Singapore are all almost entirely shutting their operations here
and relocating to KL. This is definitely bad for Singapore as many lament that
Singapore is really getting ridiculously expensive for expats. Having been to
Perth, Netherlands, Kuala Lumpur and Singapore in the last month or so, I think
this is genuinely true, especially when it comes to goods and services that are
more catered for expats – not hawker food nor HDB though which is still very
affordable.
operations in Singapore are all almost entirely shutting their operations here
and relocating to KL. This is definitely bad for Singapore as many lament that
Singapore is really getting ridiculously expensive for expats. Having been to
Perth, Netherlands, Kuala Lumpur and Singapore in the last month or so, I think
this is genuinely true, especially when it comes to goods and services that are
more catered for expats – not hawker food nor HDB though which is still very
affordable.
Rolf’s
Thoughts
Thoughts
If you ask me if oil price has already bottomed out, I seriously
don’t know and will not predict! What I know is compare to last year, this is
definitely a better time for entry into O&G stocks. Overall, I still think
that oil price at $30 or even $40 is seriously not sustainable in the longer
term.
don’t know and will not predict! What I know is compare to last year, this is
definitely a better time for entry into O&G stocks. Overall, I still think
that oil price at $30 or even $40 is seriously not sustainable in the longer
term.
That said, while oil price directly impact Oil companies’ revenue
and have a faster effect to her top and bottom lines, this is not the same for
companies further down the supply chain. Even if oil price increases, Oil
companies still need time to invest, and it is going to take time before new
projects will be seen.
This means many companies will see fundamental problems of lack of revenue and
thinner margins.
and have a faster effect to her top and bottom lines, this is not the same for
companies further down the supply chain. Even if oil price increases, Oil
companies still need time to invest, and it is going to take time before new
projects will be seen.
This means many companies will see fundamental problems of lack of revenue and
thinner margins.
The recent rebound of share prices in tandem to oil price is supposedly
just market reaction. Market in the short term at most times does not care
about the fundamentals. So if you think that just because the Oil and Gas
companies’ share prices have rebounded in the last two weeks, the companies are
going to report strong figures in coming quarters? Then I will beg to differ.
I suspect, in terms of company performance, the worst have yet to come. Many
people I know are still having their jobs intact having to finish the backlog
project in 2016 and early 2017. The sentiments are not exactly that bad yet!
just market reaction. Market in the short term at most times does not care
about the fundamentals. So if you think that just because the Oil and Gas
companies’ share prices have rebounded in the last two weeks, the companies are
going to report strong figures in coming quarters? Then I will beg to differ.
I suspect, in terms of company performance, the worst have yet to come. Many
people I know are still having their jobs intact having to finish the backlog
project in 2016 and early 2017. The sentiments are not exactly that bad yet!
I believe beginning or mid of 2017 should be the time with most
pain felt!
pain felt!
And since there is normally a lag in share pricing relative to
company’s fundamentals with pessimism or optimism embedded into the share
price, if I really need to predict when to invest into Oil and Gas stocks, I will
think that it is better to wait until the end of this year or early next year
before we have better visibility to make the correct decision. I could be wrong!
company’s fundamentals with pessimism or optimism embedded into the share
price, if I really need to predict when to invest into Oil and Gas stocks, I will
think that it is better to wait until the end of this year or early next year
before we have better visibility to make the correct decision. I could be wrong!
Rolf,
You have made some retail investors very blue this Easter 🙁
Other than that, refreshing insights from one working INSIDE the industry versus those working OUTSIDE attempting to understand the O&G industry from sell side analysts' recommendations 😉
Good one!
Hi Jared,
Thank you for the compliments.
I guess I am not so influential. It is likely Good Friday itself or the day after it, which are supposed to be blue! Ok, today is Easter, a much happier resurrection day!
Since I am in the industry, I seriously hope to see the Sun after the rain soon! Pray Pray Pray!
while the fed has been delaying the rate hike, the 'hot' money has been flowing from one place to another. this is the time for short time plays. I just got out of energy play the week before. didn't earn all of it. but did get some.
and this is what everyone should be doing for the forseeable future, i feel.
Hi SMK,
Indeed the volatility in O&G is an appropriate time for smart traders to work their magic.
That said, even for long term investors, making entry now is still not too bad a time as well, compared to a year back.
Afterall, we cannot tell when/where is the bottom. Or do we?
if only, there is an index indicator that can let us know in advance. 🙂
Hi Rolf, Thanks for your "insider information" to the oil and gas industry. There goes my chances of jumping into the oil and gas industry from another resource based industry.
I've got a "newbie" question regarding the oil and gas companies. I was hopping you are able to enlighten me.
It is regarding the reserve replacement. With the current prices, are the oil companies drilling to replace their reserves?
i got a question too.
is this increasing?
http://www.forbes.com/sites/sarazervos/2015/12/22/worlds-oil-tanks-are-close-to-filling-up-as-prices-keep-dropping-whats-next/#1a957f5767f6
http://www.wsj.com/articles/worlds-largest-traders-use-offshore-supertankers-to-store-oil-1421689744
http://www.wsj.com/articles/oil-tankers-are-filling-up-and-raking-it-in-1435273625
Hi Chewyc,
Thanks for dropping by. News and info are just news and info. In the short run, market does not really care! Therefore, you can still ride in and out and profit from the up and down cycle like SMK mentioned. Or I also mentioned that now is still not a bad time for entry compared to last year and before, except that selection of stocks have to be more careful.
Reserve replacement? To be honest, I am newbie on this topic as well! Hope you can pardon me with the answers then which I will try to answer to the best of our imagination.
I reckon, oil companies still require to drill and produce for reserve replacement, but with the oil price this depressed, the whole process will definitely slow down and likely they will also looking for other means such as LNG and oil sands etc to contribute to the reserves.
Frankly, cheap oil is more and more difficult to find for many Oil companies, hence the cost of producing oil or reserves for this matters, is going to be much higher than the $30-40 mark they are selling. And reserve oil has to be of good quality. Furthermore how accurate the reserves Figure Company published, we also have to ponder.
This is my humble opinion. Still, I have confident in the industry over long term, just need to fine-tune the right time to enter for a cyclical industry, I think.
Hi SMK,
You are right. Anyway, in response to your question, I just wrote an article. 🙂
Rolf, I really hope there will be another buying opportunity to buy companies like Royal Dutch Shell and Exxon.
Hi Yaruzi,
Buying oil companies which is directly at the top of the chain sounds like a better choice if the time/price is right. They will have more control compares to those below the supply chain.
If you look at CNOOC vs Exxon and Shell, the drop is more drastic. Maybe better choice? You will know better becos you are just so smart to do that! hehe….
hi Rolf,
hot stacked , and plenty are cold stack and some even scrapped!
on the topic of jack-ups (JU).. there are many of them approaching their 5 year inspection. which coincides with the last construction boom. i understand, some of them spend up to 30mil to keep it in class (depending on region/sector). in this climate, there are not many rig owners willing to do so.
However, that being said, if we all survive this cycle, in the next 5-7 years, there might be another boom. (hey, the 7 year itch not only applies to humans, but even industry)
a small little bright spark; keppel delivered 2x JU to Gruppo for Pemex at a day rate of $130k (which to me, is abit surprising)
Hi FC,
Yes plenty cold stack.
O&G is afterall cyclical. When times is good, everyone rush in, vice versa. It is also partly affected by interest rate where the cost of financing is cheaper in the past few years allowing many newbuilds. 5-7 years is a business cycle.
In some cases Keppel do co-own the assets even after delivery. Not sure these Pemex ones!
Now since the industry is already getting so bad, no point fretting over it anymore. In fact all the preparation is better to perform during early stage. Being slightly paranoid during end 2014, I kind of already mentally tuned to see the worst. Whether it happens or not, it's another thing.
https://rolfsuey.com/2015/06/oil-gas-crisis-time-to-take-on-more.html?m=1
For now, the most appropriate thing to do now is just do our job and don't think so much.
Hope this crisis will come to an end soon! Best of luck to you.