Oil & Gas sector (Part II) - OCBC Investment 2016-11-30: Taking Stock Of The Singapore Scene

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Singapore Stock Market Oil & Gas Sector

Oil & Gas sector (Part II) - Taking Stock Of The Singapore Scene

Casualties to date 

1. Technics Oil & Gas

• Offshore services provider – integrated compression systems and process modules, amongst others
• Filed for judicial management in end May 2016
• Net gearing of 0.49x as of Mar 2016 was below sector average
• Main banker: UOB 

2. Linc Energy

• Upstream E&P – Unconventional gas, coal deposits
• Delisted from the ASX to float on the SGX in late 2013
• Entered into voluntary administration in Apr 2016 

3. Lime Petroleum

• Upstream E&P with exploration licenses
• 65% owned by SGX-listed Rex International, 35% by Gulf Hibiscus, subsidiary of Malaysian-listed Hibiscus Petroleum
• Filed for winding up application on Mar 2016 

4. Swiber Holdings

• Offshore Engineering, Procurement, Commissioning (EPC) provider
• Winding up application on 28 Jul 2016
• Main bankers: i. DBS - US$736m ii. China Devt Bank – US$131m iii. ICICI Bank (India) – US$51m iv. UOB: US$35m 

5. Swissco Holdings

• Engaged in vessel and rig chartering, as well as repair
• Owes S$255m to seven banks a. UOB is the largest lender b. Followed by DBS
• Debt restructuring plan went into a stalemate as lenders were unwilling to take a substantial hair cut in a proposal tabled by a Chinese investor
• Filed for interim judicial management in Nov 2016 

Those with bonds that have undergone/undergoing restructuring 

1. Ausgroup

• Provides fabrication, construction and maintenance services to natural resources sectors in Australia and Asia
• Main banker: DBS
• S$110m, 7.45% notes due Oct 2016 restructured as follows: 
  • Maturity date extended till Oct 2018, with possibility of another 12 month extension (to be approved) 
  • Interest rate from Oct 2016 to Oct 2017 – increased to 7.95% p.a.
  • Interest rate from Oct 2017 to Oct 2018 – increased to 8.45% p.a.
• Relatively easier to restructure as the group has assets (Port Melville) as a form of security 

2. Rickmers Maritime

• A business trust which owns and operates containerships
• Main banker: Eight banks listed in 2015 Annual report including DBS and HSBC
• S$100m, 8.45% notes due May 2017 proposed to be restructured as follows: o Redeem S$60m principal with issue of 1.32b new units o S$40m outstanding repayable in 2023 with step-up coupon rates o Special upfront coupon payment of S$500k to be paid to noteholders
• Restructuring of other debt with lenders still ongoing 

3. Marco Polo Marine

• Engages in shipbuilding, repair and chartering of OSVs and tugs and barges
• Bankers include OCBC
• S$50m, 5.75% notes due Oct 2016 restructured as follows: o Maturity date extended till Oct 2019 o Additional interest of 1.5% p.a.; additional interest payable in two instalments
• Relatively easier to restructure as the group has assets as a form of security (noteholders get second ranking mortgage over Batam shipyard land) 

4. KrisEnergy

• Independent upstream company focused on production and development of oil and gas in SE Asia
• Company’s revolving credit facility transferred to single lender, DBS from a few banks including HSBC and ANZ in the middle of this year
• S$130m, 6.25% notes due Jun 2017 and S$200m 5.75% notes due Aug 2018 currently undergoing restructuring
• The group has obtained the support of Keppel Corporation, its major shareholder to underwrite a preferential offering (S$140m of senior zero coupon notes with warrants for future upside potential) 

5. Perisai Petroleum Teknologi Bhd

• Kuala-Lumpur listed offshore services firm that is an associate of Ezra Holdings
• Has been classified as a Practice Note 17 (PN17) company i.e. insolvent
• Previous attempts to negotiate with bondholders had failed
• In order to maintain its Bursa listing, it must regularise its financial position within 12 months 

6. Ezra Holdings

• Engages in OSV chartering, offshore fabrication, and subsea work
• S$150m, 4.875% notes due Apr 2018 o Waive any breach or potential breach of covenants o Waive occurance of any event of default or potential event of default, amongst others 

7. Pacific Radiance

• Engages in OSV chartering, repair
• S$100m, 4.3% bond due Aug 2018
• Loosened debt covenants of bonds (S$100m 4.3% due 2018) last year
• Has not undergone major restructuring of bonds besides this.

Companies’ financial positions and debt servicing abilities

• ASL Marine has a S$100m bond coming up for maturity in Mar next year but it has garnered the support of various lenders with a 5- year club term loan facility of S$99.9m for working capital; a S$24.9m rights issue will also help to provide some funds. As of 30 Sep, the group had S$37m of cash and S$566m of debt (S$348m current debt).
• Ausgroup’s bond restructuring process was successfully concluded on 5 Oct 2016. As at 30 Sep 2016, it had A$30m of cash and cash equivalents, A$141m of current debt and A$39m of non-current debt. The group was in a negative equity position, and is currently in the process of renegotiating loans and facilities with DBS Bank, including financial covenants. Management is assessing options to ensure that sufficient cashflow is in place to enable the group to meet its obligations. As such, a potential option is converting some debt to equity, should lenders be amenable to it.
• Dyna-Mac Holdings’ net order book has gone down to S$18m as at end 3Q16, which is about half of 3Q16 revenue (S$34m). With the decline in activity, the group has redeemed its bonds before maturity, marking it as the only issuer in the O&M sector to be able to do this, based on our understanding. The group is also in a net cash position due to prudent management of the company.
• As of 31 Aug 2016, EMAS Offshore had US$12.5m in cash along with US$568m of bank borrowings (all current) and US$97m of lease obligations (all current). It has presented all its borrowings as current as it had breached financial covenants, though waivers have been obtained and/or amendments have been arrived at. The group has reached in-principle agreements with the majority of its principal bankers on the refinancing of its financial obligations, and is also in the process of finalising additional working capital facilities. These are expected to be concluded before the end of the 1QFY17.
• Ezion Holdings had US$255m of cash and cash equivalents alongside US$353m of current debt and US$1,190m of non-current debt as of end Sep 2016, resulting in a net debt/equity of 0.9x. Its earliest bond maturing is in Aug 2018 (S$60m).
• Ezra Holdings has been divesting its assets, and its JV with Chiyoda has also helped to alleviate its balance sheet stress. Its only bond is maturing in Apr 2018 (S$150m), and has obtained bondholders’ consent to loosen covenants. Complicating things is associate Perisai Petroleum’s insolvency, which involves cross-default clauses.
• As at 31 May 2016, it had US$109m of cash, of which US$66m were pledged. Current debt stood at US$524m and non-current debt at US$687m. The group has received approval from the SGX to postpone the announcement of its FY16 results.
• As at 30 Sep 2016, Falcon Energy had US$31m in cash, current debt of US$112m and non-current debt of US$88m, resulting in a net gearing of 0.5x. The group had ordered a US$226m jack-up rig from Keppel in Apr 2013 with delivery scheduled to be in 4Q15, but this has been deferred to 2016. At Keppel’s latest results briefing on 20 Oct 2016, it was mentioned that Keppel is still targeting to deliver the rig to Falcon by this year, as Falcon is in active conversation with potential customers. It has a S$50m bond maturing in Sep 2017.
• Keppel Corp had cash and cash equivalents of S$2.0b and was in a net operating cash inflow was S$274m in 9M16. It has committed S$140m for KrisEnergy’s senior secured zero coupon notes, along with another S$138m for the warrants.
• KrisEnergy has proposed a restructuring plan for its two bonds, a S$130m due 2017 and S$200m due 2018. It has the support of its main lender, DBS, and major shareholder, Keppel Corporation, and has now requested bond holders to support the restructuring plan.
• Keppel believes that KrisEnergy’s intrinsic value, reflected in its NTA of US$0.26/share requires time, execution of the revised business plan and the proposed financial restructuring to realise.
• The auditor of KS Energy has raised concerns about its ability to continue as a going concern. The group also previously mentioned that it was looking for buyers for its distribution business. As mentioned in its 3Q16 results, the group also plans to refinance the $45m of 6% convertible bonds (maturing 21 Dec 2016) and $7.5m of 6% convertible bonds (supplemental agreement being drawn up to extend maturity to 21 Dec 2016 as well), including secured borrowings repayable in the next 12 months.
• As at 30 Jun 2016, Marco Polo Marine had S$18m cash, S$186m of current debt and S$67m of non-current debt, resulting in a net gearing of 1.4x. The group is currently embroiled in a lawsuit with Sembcorp Marine with regards to a jack-up rig which it previously ordered from the yard. It has also undergone debt restructuring with regards to its bond.
• As at 30 Sep 2016, Nam Cheong had RM338m in cash, current debt of RM902m and non-current debt of RM888m, resulting in net gearing of 1.1x. As the group has not received new orders for about two years and outlook remains dim, bank support is critical going forward. Its earliest bond maturing is a S$90m note maturing in Aug 2017.
• As at 30 Sep 2016, Pacific Radiance had US$29m in cash, US$103m of current debt, and US$407m of non-current debt.
• Under a series of agreements with its main financial institutions and partners concluded in Oct, the profile of the group’s term loans has been refinanced to 12 years from an average of seven years previously. The reduction in loan principal repayments of about US$103m over the next three years to 2019 is expected to enhance the group’s liquidity position and financing cash flows in the near to medium term.
• As at 30 Sep 2016, POSH had US$13.8m in cash, US$186m of current debt and US$441m of non-current debt. Its net debt/equity ratio is relatively low at 0.6x and the group still has available undrawn bank lines of about US$365.8m. We would, however, look out for the amount of impairments coming up in 4Q16, which would impact its net gearing.
• Ramba Energy had S$21m in cash and S$11m of debt as at 30 Sep 2016, alongside S$61m in equity. The group has undertaken a rights cum warrants issue to raise S$11.3m to finance its exploration, development, general and admin expenses, loan repayment and corporate expenses.
• Rex International had US$29m in cash as of 30 Sep 2016, along with US$67m of current debt; zero long-term debt. Its subsidiary, Lime Petroleum, filed for winding up application earlier this year.
• RH Petrogas had US$11m in cash along with US$10m current debt and US$15m of non-current debt as of 30 Sep 2016. The group is in a negative equity position. The auditor has raised concerns about its ability to continue as a going concern. Meanwhile, the group has received an undertaking from its controlling shareholder to provide adequate funds until 30 Jun 2017 to meet future cash obligations. From 1 Jun 2015 to 30 Sep 2016, the group had received a total of about US$14.8m in interest free loans from the controlling shareholder.
• Sembcorp Marine had S$1.5b in cash, S$723m of current debt and S$3.39b of long-term debt as of 30 Sep 2016, resulting in a net gearing of about 1.0x. As capex needs taper off and the need for fresh working capital to fulfill back-end loaded rigs decreases, the likelihood for a fund raising would be lower, unless unexpected payment delays from major customers occur.
• Triyards Holdings had US$37.9m of cash as of 31 Aug, of which US$22.3m was pledged. Current debt stood at US$138m while non-current debt was US$12m; net gearing was 0.6x. It has not issued any bonds.
• As at 30 Sep, Vallianz Holdings had US$37m of cash, US$146m of current debt and US$224m of non-current debt against US$280m of equity. The group has a S$60m bond maturing in Nov this year, and it has fully redeemed the notes with internally-generated funds and advances from its controlling shareholder, Rawabi Holding Company. Besides this, it also has a US$22.5m, 4% perp.
• VARD Holdings had NOK 525m of cash as at 30 Sep, along with NOK 8,108m of current debt and NOK 1,056m of non-current debt. Most of its current debt is from construction loans, which mature on vessel delivery and secured by the vessels under construction. The group has received an offer from its parent, Fincantieri, who has the aim of privatising the group. 

OUTLOOK 

Recovery in sentiment in 2017? 

• After enduring a dramatic fall in stock prices in 2H14, further drops in 2015, and lacklustre performance in 2016, could it be time for a sectoral recovery in 2017? To start off, investors must understand that there are different sub-sectors in the broader oil and gas industry, and most SGX-listed companies are involved in the upstream segment. They are further divided into asset fabricators, owners and charterers, as well as service providers. Within their respective segments, they could cater to rigs (drilling or accommodation), or offshore support vessels (AHTS or PSV or construction vessels). Finally, there are also the Exploration and Production (E&P) companies whose assets are either oil or gas fields or both.
• Our sense is that should there be a sustained recovery in oil prices next year, E&P companies stand to benefit first as they are regarded as more direct proxies of the oil price, unlike other O&M companies that may have a lag time in terms of recovery. Investors should be selective, however, as a few companies in this sub-sector are in precarious financial positions.
• The drillers and vessel charterers could then be next in line, as well as the service providers. Asset fabricators (i.e. the yards), who depend on new order flows, could take a longer time to see earnings recovery, as their clients first have to regain confidence in the market before ordering new assets from them. Meanwhile, do note that the downstream players are still doing relatively well, as they execute maintenance contracts that are recurring in nature; the oil glut has also led to a shortage of storage facilities around the world. Companies listed on the SGX are mainly service providers to the downstream segment rather than refineries.
• In 2017, we could also see more privatisations and M&A activities should valuations remain low; already we have seen Otto Marine delisted after receiving an offer from its major shareholder, while VARD Holdings has also received an offer from its parent company. Possible candidates to look out for include PACC Offshore Services Holdings, Mermaid Maritime, PEC Ltd, Baker Tech, Dyna-Mac Holdings and possibly Pacific Radiance at a later point in time.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-11-30

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