Oil Price Slump – Thoughts Prompted During OSEA 2014 Exhibition

It’s been two weeks since I last updated my blog. You probably wonder if
I had gone hiding after the oil price slump. Haha, Not really!
The last two weeks were madly busy for me. It was hectic preparation for
OSEA 2014 (Offshore South East Asia – oil
and gas), one of the biggest O&G exhibitions in Singapore. My company exhibited
and my bosses, colleagues and O&G people all over the world are converging to
Singapore MBS on 2-5 Dec.  
Below pictures taken during the show – a comparison between Keppel
O&M stand and Russian O&G Company Gazprom stand. Which booths to visit?
For business, it is probably Keppel. For leisure it will be Gazprom.
 
In the same week during the exhibition, I also had client meetings at
offices, and dinner parties. The week ended with outstation to China attending
a vessel completion ceremony.
Busy Busy
Busy!
During this period, I met with many industry people. Below is a
consolidation of what I heard from people, assimilated with my thoughts
pertaining to the oil price slumps!  
Pessimism for the next two years or so
Most people expressed
pessimisms with the deflated oil price. Sales target in 2015 will be moderated
down. Employers do not anticipate expansion plans and several will display retrenchment
knives. Employees should cherish their current jobs.
Oil companies slash jobs
On the first
day of the exhibition, BP share price rise 4.8% amid takeover by Shell. Few days
later BP announced to slash hundreds of jobs. Rivals such as Shell, Chevron and
Statoil have already announced significant job retrenchments as the 40% price drop
of crude had caused rethink of new exploration and production projects.
It’s just cycles, business as usual and time to plan

Spoke to a CEO of a SGX listed company. I asked if he is worried on the
current crisis and its impact on his company. He smiled and answered that it’s
just market cycles and business as usual.
 He also explained that this is also what they
had gone through before. 

Most veterans
in the industry are indeed not bothered. They had seen enough of ups and downs
throughout their careers. Some said, r
ather than
brooding over the downtrend, it is the best time for companies to plan for the
upturn in 2017 and beyond.  

Is this going to be as bad as the GFC?

The Global
Financial Crisis (GFC) is always so recent and vivid to me, since its impact
was drastic. I personally experience the up and down within the company I was
working for, then. It was my ex-company record revenue accompanied by exaggerated
D&D party at 5 star hotel in 2007. Then a twist of fate in 2009, which saw
retrenchments and shutting down of factories regionally.

The impact of GFC to the O&G industry was huge. Financial
institutions were most hardly hit themselves and wary of lending. Rigs and
vessels speculated when oil price was $140s pb, suddenly worth so much lesser
when price landslide to $40s. “Euphoria” and “Fear” exchanged positions within
short space of time. Many projects come to standstill and cancellation
contracts were widespread.


Source: Macrotrends
Highly
leveraged companies like
Ezra, Swiber and Jaya witnessed their share price tumbles from as high as mid dollars
to meagre tens of cents. Speculators such as
Otto Marine and Nam Cheong
suffered from unsold vessels without potential buyers. Blue chips like
Keppel and Semb Marine were not spared either. Their market values crippled
4-5 times down.

Most Companies Survived the GFC

It is about survival! All O&G companies mentioned herein pulled
through the tough times in the 2009, but many licked their wounds for a long
time. The blue chips did recover quicker to pre-crisis price whilst the medium
and smaller caps, never bounce back to their artificially inflated price before
the crisis.

Rolf’s View

Is the
current oil crisis as bad as the GFC? Probably not! However Oil and Gas sector
is highly cyclical. We should take great deal of care before investing in this
sector. In my next article, I will discuss what is the approach to take with
regards to your oil and gas stock portfolio.

Stay tuned to part 2.

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5 thoughts on “Oil Price Slump – Thoughts Prompted During OSEA 2014 Exhibition

  1. Hi Rolf

    Thanks for sharing this.

    I got a feeling that we are working nearby 🙂

    You have been in this sector for more than 10 years, so you must have been through this cycle of ups and downs. The cycle itself is not scary, what is scary to me is how weak O&G companies might falter because of the drop in the core business revenue mainstream. The management should know that this is a commodities cycle taking place but hopefully they did not get their pants caught offguard by this instance.

    1. Hi B,

      Thanks for the comments.

      You are working in Tuas? Haha, I am not working for Keppel. I just took picture of their booth, since I think they are a company doing Sg proud worldwide in O&G sector. I am all along in equipment sector with experience exposing to Vessel owners and builders.

      I agree with you that from outsider/ retail investor point of view faltering business is scary for company with weak balance sheet. Invest with care. I know the difficulty myself, since I use to work in listed co responsible for overall mgmt which also incl. finance, resolving cash flow issues etc. You will never be able to wonder how bad a company from inside than from outside!

      For current situation, we must be prudent but not overly worry of collapse. Of course situation may worsen further, I don't know.

      One good thing about O&G is backlog order. This allow company to plan ahead and have more reaction time to plan cost restructuring. It is not like what retailer think that impact will be immediate. Going through the GFC is another experience that companies are more prudent and knowing better to survive.

      It is also important sometimes to look beyond balance sheet E.g. Who is leading the company, management resilience, track records of overcoming crisis, insider news of potential orders on tender etc. E.g Baker Tech has exceptional balance sheet no debt, but that does not mean it is a company to go for indefinitely. Another eg is Marco Polo. Good statistics and seems like a good buy. This is a company to sustain its business, but do they have the leader to grow? Being in the industry, we do have a slight edge knowing more about the people and company over the years.

      Its hard to convince I know. I am just reciting base on experience and what I seen and heard before.

      I definitely can be wrong, and I agree that its best to mitigate risk in this tough time for O&G companies.

      I will explain more if one day we meet. 🙂

    1. Hi Naro,

      Very nice to see you around again. Thank you for reading tihs article.

      Part 2 is in the oven. Not sure if it will be delicious when serve, but the effort to prepare is guaranteed! 🙂

      Rolf

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