SINGAPORE (Feb 12): Oil majors such as Royal Dutch Shell and BP, which are present in the entire oil and gas value chain — from exploration, production and refining to motorway stations — have had a tremendous 2017. Their outlook for energy and their committed capital expenditure are important because they are the end-customers of locally listed offshore service vessel providers and shipyards.
On Feb 6, BP announced that 4QFY2017 net earnings quadrupled y-o-y to US$2.1 billion ($2.8 billion) versus US$400 million in the same quarter a year ago. Net profit
for FY2017 more than doubled to US$7.17 billion. In a call to analysts, chief financial officer Brian Gilvary said BP would continue to drive down its breakeven costs from US$50 a barrel to as low as US$30 a barrel.
On Feb 1, Ben van Beurden, CEO of Shell, said in a results teleconference: “It has been a great year. It has been a transformative year. We said 2017 would be a year of delivery and we have delivered.”
Shell announced net earnings of US$12.98 billion for FY2017, up 184%. Net earnings for 4QFY2017 doubled to US$3.81 billion. Cash flow from operations was US$36 billion, and free cash flow was more than US$27 billion. All of this was achieved at an average Brent Crude price of US$54 a barrel for the year.
Shell also announced a large discovery in the Gulf of Mexico. Drilling is underway to gauge development options. Separately, along with its partners, the oil behemoth won nine exploration blocks in the Gulf of Mexico. The company’s capital expenditure for 2017 was US$25 billion, slightly lower than the US$26 billion for 2016.
The International Monetary Fund has revised global growth upwards by 0.2 percentage point to 3.9% for this year and 2019. Faster growth implies more energy use. Oil and gas are not the only sources of energy. Shell is investing more in other sources. For instance, last November, it announced that the group planned to increase spending on new energies at the rate of US$1 billion to US$2 billion a year until 2020. Also, it signed an agreement with IONITY, operator of high-powered vehicle-charging networks, to provide 500 charge points at Shell motorway stations in 10 European countries.
Separately, Shell signed an agreement with UK-based First Utility, a household energy and broadband supplier, to deliver power to homes. “We see opportunities in different parts of the power value chain and additional opportunity through the integration of these parts,” Van Beuren said.
Elsewhere, ExxonMobil, along with Chevron, plans to spend more on shale. ConocoPhilips exited deepwater oil in 2017.
New orders trickle in for locally listed yards
Last December, Sembcorp Marine signed a letter of intent with Shell for the construction of a Vito floating production unit. “SembMarine is expected to convert its LOI with Shell for the Vito project into a firm contract upon Shell’s sanction of the project later in mid-2018. Energy Maritime Associate estimates the entire project to be worth US$1.25 billion, and it is expected that this will contribute significantly to SembMarine’s earnings in 2HFY2018,” says Foo Zhi Wei, an analyst at UOB Kay Hian, in a Feb 5 update.
Interestingly, drilling contractor Frigstard Offshore put out a tender inquiry seeking to price a potential construction of a harsh environment semi-submersible drilling rig. The rig design is expected to be for a Frigstad D90 AWD, and capable of operating in water depths ranging from 350ft to 14,000ft. “This could be a contract worth more than US$300 million for shipyards. We expect Singapore shipyards to potentially benefit from a contract win, given the pricing advantage relative to its South Korean peers,” Foo says.
SembMarine was awarded the contract for construction of the Johan Castberg floating production, storage and offloading (FPSO) hull and living quarters last December, around the same time that Statoil submitted the project for approval. A cancellation clause exists that links the contract to approval of the project. Although local yards are not believed to have a chance for a topsides construction and integration management deal from Statoil for the Johan Castberg FPSO, SembMarine is believed to be still pursuing the contract.
Upstream, which reports on offshore news, indicated that SembMarine is in pole position to secure a contract to construct an FPSO unit for Energean Oil & Gas’ US$1.5 billion Karish gas project. A contract is expected to be awarded soon, with Energy Maritime Associate estimating the FPSO contract to be worth US$650 million to US$750 million.
BP is set to select a bidder for the Tortue FPSO from a list of companies that includes Hyundai Heavy Industries, Modec (in a joint venture with Sembcorp Marine’s Jurong Shipyard), and Dalian Shipbuilding. Tokyo-listed Modec builds and supplies FPSOs for the oil and gas sector. Some of its FPSOs have been built at Jurong Shipyard.
Vard Holdings announced it had secured a contract for the construction of one fully electrical battery-powered car and passenger ferry. The vessel, designed by Multi Maritime for environmentally friendly operations in the Norwegian fjords, features a fully electrical battery solution for continuous electric operations. It will have a capacity of up to 60 cars and 199 passengers and crew. The vessel is scheduled for delivery in 3Q2019; no contract value was specified.
Generally, however, shipyard owners remain cautious. In a recent results briefing, Chris Ong, CEO of Keppel Offshore and Marine, said: “This is an uptick in sentiment from the market, purely from better economic growth and the [firmer] oil price. We think [rig] rates and utilisation will have to recover before we see a meaningful uptick in new orders for drilling rigs.”
Will Barossa save OSV providers?
A mega project could emerge from Northern Australia that could have the same impact as the Gorgon field, which put Ezion Holdings on investors’ radar in 2009. Barossa, a gas and condensate field located in the Bonaparte Basin of the Timor Sea off the northern coast of Australia, is planned to be developed with a water depth of between 130m and 350m. It is likely to be developed with the Caldita field under the umbrella of the Barossa offshore development project. The project is owned by the Barossa-Caldita joint venture, which comprises ConocoPhillips Australia Exploration (37.5%), SK E&S Australia (37.5%) and Santos Offshore (25%).
ConocoPhillips serves as the operator and has submitted a development proposal to the National Offshore Petroleum Safety and Environmental Management Authority.
First gas from the offshore project is expected to be achieved in 2023. The estimated annual production rate is 3.7 million tonnes of liquefied natural gas and 1.5 million barrels of gas. The project is expected to have a lifespan of about 20 years from first gas. Pre-front-end engineering and design (Pre-FEED) work is underway and will be followed by FEED studies this year. The final investment decision on the project is expected in 2019.
At least two bidding groups will be selected for the FEED competition in 2018. As one of the groups involves Modec, SembMarine could benefit if Modec wins the contract. AusGroup’s Port Melville project could also benefit.
OSV providers still stressed
Oil prices have recovered and are up 18% from a year ago to around US$66 a barrel now. Not surprisingly, sentiment has turned positive on some oil-related companies. In addition, oil majors are announcing some rebound in offshore activity.
Some Southeast Asian economies are expected to approve the development of 50 oil and gas fields from now till 2020. According to Rystad Energy, these fields require some US$28 billion of capex. Indonesia is expected to make up most of these investment decisions with Malaysia accounting for a significant amount of capex too.
“The biggest beneficiaries from this rise in capital spending are primarily cabotage markets. Within our coverage, Wintermar Offshore is our preferred pick within the space, given its robust cash flows and strong balance sheet among its peers,” Foo says.
Many oil and gas projects are materialising now because of cost cutting efforts made during the lean years of 2014 to 2017 but an oversupply of offshore support vessels (OSVs) may continue to exert pricing pressure. “Service pricing continues to remain depressed and is not expected to rise sharply despite the higher offshore activity. As such, it may be hard to see a solid earnings turnaround for the offshore services companies; rather share prices are picking up on the prospects that the cash-flow crunch is easing for these companies,” Foo cautions.
The highly leveraged local OSV providers are not out of the woods. The risks remain high, and they could still be in danger of defaulting if banks withdraw support, Foo warns. Analysts have been warning investors who may want an inflation hedge to stay with SembMarine, its parent Sembcorp Industries and Keppel Corp.
Oil and gas value chain
The value chain starts with exploration for oil and gas. After initial exploration, oil and gas fields are appraised and developed, and production starts. These activities are known as exploration and production (E&P), and are part of the upstream stage.
The E&P stage requires oilfield services including drilling, equipment supply and infrastructure for production. The infrastructure and other support services for the field is provided for by logistics companies or offshore service vessel providers. The OSV operators carry equipment such as pipes, drilling equipment and perishables to the rigs and production platforms in the E&P phase.
The second part of the value chain — midstream — is supported by floating production, storage and offloading units, which carry the oil and liquefied natural gas from the fields to the refineries. Here too, OSVs are required. Companies such as Sembcorp Marine and Keppel Corp build and service the FPSOs.
Several companies providing services in the global upstream and midstream phases here are listed locally but are financially stressed, as illustrated in the flow chart.
The extent of the distress is illustrated in the scatter chart. This displays valuation (EV/Ebitda) against core compounded annual growth rate of earnings (Ebitda). The best place to be is in the lower right hand quadrant and as far to the right as possible. Local offshore and marine plays, most of which are OSV providers, are far to the left, indicating very poor core earnings. Even SembMarine and Keppel are in the left hand quadrant, but in the right hand corner of the upper left hand quadrant as their core earnings collapsed. PACC Offshore Services Holdings, the Kuok family-owned OSV provider, is in the far left of the chart, displaying poor core earnings during the past five years.
The most interesting company is Federal International, procurement specialist and stockist for the oil and gas industry whose customers are Petrochina, CNOOC, BP, Chevron, Petronas, Pertamina, PTTEP and Total.
Federal’s gross profit margins are modest, around 15%. For the nine months to Sept 30, revenue rose 58.1% to $107.57 million. Net profit fell 22.2% to $3.86 million because of one-time legal costs and related professional fees. Net asset value per share was 60.93 cents. This company looks like an undervalued survivor of the offshore deluge.
