A massive wave of asset impairments is about to hit Singapore’s O&G service providers

Listed companies stand to lose millions.

There will be plenty of red ink in offshore service asset owners’ books this year. Analysts warn that hefty impairments await listed oil and gas service providers, as many support vessels have lost their value after the oil price collapse.

According to DBS, majority of the service providers in the region have not yet undertaken significant impairments to their offshore service assets, despite the fact that oil prices have crashed by over 70% and now hover at just US$30 per barrel.

The report noted that newbuild ship prices have crashed by about 30% to 40%, while secondhand prices have dropped by 26% to 40% across the board. Prices for older vessels around 10 years old have dropped by 28% to 50%.

“We think most of the offshore service asset owners are likely to report asset impairments (mainly from their vessels/rigs) in 4Q15 and the early part of FY16,” the report said.

The report attempted to quantify the potential losses by assuming a ballpark 20% decline on service assets currently part of each company’s fleet, disregarding the fact that impairment charges will vary from vessel to vessel depending on age, cost and charter outlook, among others. 

DBS' estimates show that listed O&G service providers stand to lose millions. Among the hardest-hit will be PACC Offshore, Otto Marine, Pacific Radiance, and Vallianz.
On the flip side, though, massive one-off impairments are unlikely to cause further damage to these companies’ share prices.

“At current valuation levels though, we think impairments have already been priced in and the market won’t be too surprised by large one-off items. In this environment, cash flow is king, and given that impairments are a non-cash item, we think the impact on the share price of service asset players shall be minimal,” DBS said.