No safe harbor: All offshore players now at risk as oil price rout intensifies

Weaker players might sabotage the entire industry.

Analysts had initially expected some offshore players to be insulated from the oil price rout, but these initial forecasts may fail to deliver.

According to Maybank Kim Eng, the entire value chain is now vulnerable as the Brent hovers at the US$60 per barrel range. “Expectations of insulation against oil price dip for certain players are being tested as cracks emerge. Weaker players may start to operate on cash flows over profitability, sabotaging the whole industry’s margins,” the report stated.

“After scrutinising the balance sheets and cash flows of Singapore O&M stocks, we conclude that most have the financial wherewithal to weather this downturn. We flag Cosco’s and Swiber’s high gearings and weak cash flows, compounded by operational weakness,” Maybank Kim Eng added.

Here’s more from the report:
Asset owners could favour utilisation rates over pricing. After cutting OSV rates by 4-17%, we lower FY15E-16E EPS for PACC Offshore and Pacific Radiance by 11-19%.

As we believe Nam Cheong may lower prices to ensure vessel sales, we cut sale prices by 5% and shipbuilding margins by 2ppts.

This results in 11-12% FY15E-16E EPS cuts. Separately, we also cut TP for Vard from SGD0.71 to SGD0.65 due to NOK/SGD currency changes. Valuations look increasingly attractive, justifying our long-term BUYs for well-positioned players. But stocks could take another beating before recovering, as the industry comes to grips with a lower-oil-price environment.