Troubled offshore support providers trapped as oil downcycle intensifies

Asset write-downs and contract renegotiations are in the pipeline.

Offshore support firms are like struggling vessels trapped in the choppy seas of the troubled oil and gas sector.

A report by KGI Fraser noted that the worst is yet to come for offshore support providers, with contracts at risk of being renegotiated to lower rates and even sealed deals under threat from cancellations.

KGI Fraser analyst Joel Ng noted that given the 60% drop in oil prices over the year, prior assumptions that offshore support firms used to value the vessels on their books may be fairly optimistic and fail to reflect the current situation faced by the whole industry.

“Hence, we expect Singaporean companies to eventually face up to reality and write down the value of their assets. Companies with old rigs (>30 yrs old) are especially vulnerable to write-downs if they attempt to dispose or retire them. Consequently, the write-down in asset values may pose further risks of breaching debt covenants (e.g. debt-to-equity) and increase financing costs,” Ng warned.

“We estimate they may still have 10-30% more downside to reach valuations comparable to global peers. We see the 10-30% downside values as providing a floor in this oil industry down cycle. The net gearing of Singapore O&G asset owners ranges from 50% (Pacific Radiance) to 250% (Vallianz). We believe those with net debt higher than 100% (e.g. Ezion, Swiber, Vallianz, Swissco, Marco Polo, Ezra) could face severe headwinds as we see lower dayrates affect the companies in 2H15,” he added.