The activity level in the offshore and marine sector is picking up. Memories of the 2015–2016 downturn linger but industry players and analysts believe the current upcycle still has legs
The crop of Singapore-listed offshore and marine (O&M) companies is today very much a pale shadow compared to a decade ago, when oil prices were at a peak and when the call for renewable energy was ignored by most. At that time, electric car company Tesla was still an unknown curio.
Many of these O&M entities, born out of Singapore’s long history as a maritime centre, took on leverage in a bid to grow. However, when the downturn hit — and dragged on — many floundered while others managed to plod along, pleading with their creditors and long-suffering shareholders for patience.
But now, with energy prices again at lofty levels, no thanks to the war between Ukraine and Russia, the level of activity in this space has picked up visibly. Yards are getting busier, chartering demand has gone up, and the more opportunistic ones have even snapped up some assets.
Over the past few months, many of these listed O&M players have reported reduced losses. The good handful of those who have kept an even keel have reported higher earnings and fatter order books.
Investors are sharing the enthusiasm as they keep the shares of some of these O&M companies among the daily top volume list for weeks at a time. Over the past couple of weeks, the Singapore Exchange found itself compelled to query a couple of these companies whose share prices had surged, such as ASL Marine Holdings A04 , Atlantic Navigation Holdings (Singapore) 5UL , and Pacific Radiance RXS , about unusual trading activity.
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Insiders have again developed the itch to do deals, too. The shareholders controlling Penguin International are in the midst of a second attempt to privatise the company. On May 24, Saeed Investment and CEO Bill Wong, controlling around 50% and 32% respectively of Atlantic Navigation, indicated that they are “exploring strategic options” for their stakes in the offshore services provider.
Elsewhere, Lim Ah Cheng, executive chairman of Dyna-Mac Holdings NO4 , has rebuffed parties keen to buy a big stake in the company, as he prefers investors who can bring more value than just new capital. Over at Kim Heng, one investment firm offloaded its entire stake of around 18% to another. Prominent names are on opposite sides of this deal. The seller is Credence Capital, chaired by Singapore Inc stalwart Koh Boon Hwee; the buyer is Hildrics Capital, run by former UOB banker Choo Kee Siong and Wee Teng Chuen, son of UOB CEO Wee Ee Cheong.
Tandem growth
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Besides the Russia-Ukraine war, years of under-investment in this sector have been touted as another reason for the current upturn, as producers rush to meet demand and increase output in the name of energy security.
Some analysts see the upturn continuing for another two to three years, potentially leading to not just better earnings but also more deals. “There are also pockets of the supply chain that have not yet really seen the upcycle which may benefit in the later days,” says Jarick Seet of Maybank Securities. “I think the upcycle will provide opportunities for M&A which will benefit the stronger balance sheet players.”
Within the broader sector, Ho Pei Hwa of DBS Group Research describes the shipyard space as “rather promising” at the moment, with the leading players expected to see their earnings grow in the next two to three years. Oilfield service providers are also seeing rising utilisation and day rates, and therefore the risks are now lower than a few years ago. Within this sector, Ho favours Yangzijiang Shipbuilding and Seatrium, both of which are in leading positions in their respective fields.
Similarly, CGS-CIMB’s Lim Siew Khee and Izabella Tan believe that with more order wins, especially from the second half of last year, there is further upside for Seatrium and others such as Dyna-Mac.
Equally important, the order momentum for these players is getting a boost from the push for renewable energy, analysts say. “The big Singapore yards are pivoting towards clean-energy solutions such as wind-turbine installation vessels and vessels that deal with hydrogen or carbon-capture,” says Phillip Securities’ Peggy Mak. Elsewhere, Korean yards are among those that have marked out a stronghold in building liquefied natural gas (LNG) carriers, deemed as a “cleaner” energy source. Various local listed players such as Marco Polo Marine and Kim Heng have taken on wind farm-related projects even as they maintain traditional offerings.
As an indication of how rapid the pace can be, Wood Mackenzie estimates that orders for wind turbines around the world set a new record of US$15.2 billion ($20.6 billion) in 1Q2023, up US$3 billion y-o-y. “China continues to be the overwhelming driver of global activity,” says Luke Lewandowski, research director at Wood Mackenzie. “We do not see that slowing down anytime soon.”
Seatrium’s new chapter
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In the wake of the 2015–2016 crash, the handful of players left operating are deemed to have pulled through the worst and, along with the improving industry prospects, stand a good chance of moving on to their next growth chapter. At least in Singapore, CGS-CIMB’s Lim and Tan do not expect to see another wave of O&M companies going under or further significant consolidation. “Now, given the booming order flow, the strong order backlog will keep yards busy for the next three years,” says DBS’s Ho.
Mak says further consolidation is unlikely given the limited availability of yards. “Waterfront sites are limited, and [government industrial landlord] JTC owns these assets. The bigger yards can outsource work to yards outside Singapore. We think the Malaysian yards might take some of the pie as subcontractors. Consolidation might not result in positive outcomes,” she adds.
The biggest Singapore restructuring story in the O&M space is Seatrium, formed after the recently completed, long-drawn merger of Sembcorp Marine and Keppel Offshore and Marine. Both companies had been high-flying flag bearers for years, driving handsome returns for their shareholders. When the downturn hit, both struggled badly. Sembcorp Marine, for example, had to tap its shareholders twice for additional capital.
At Seatrium’s recent AGM on April 26, its newly appointed CEO Chris Ong outlined the good prospects of the addressable market the newly combined entity can try to win after emerging from a “severe and prolonged downturn”.
Over the next few decades, global energy investment is expected to rise from US$4 trillion to US$5 trillion annually. “Even as investment in renewables gains momentum, oil and gas will remain a critical resource in the short to mid-term with the anticipation of uptick because of under-investment during the last downcycle,” says Ong.
He told shareholders the O&M business serving oil and gas was estimated to be around US$290 billion between 2021 and 2030, while the market for offshore renewables might grow to US$260 billion over the same period. “[Seatrium] will continue to build on the proud heritage of both companies to create a new company with twice the scale and twice the opportunity,” adds Ong.
Ong made his AGM debut, albeit virtually, with some positive news for his shareholders. For FY2022 ended December 2022, revenue increased by just 5% y-o-y to $1.95 billion, but losses had been reduced by 78% y-o-y to $261 million. As an indication of its recovery trajectory, ebitda was positive in 2HFY2022 versus a full-year negative ebitda of $7 million, an improvement of 99% versus the preceding FY2021.
The bigger cheer came from Seatrium’s update that it has built up an order book of some $20 billion, to be fulfilled between this year and 2026 — a “spectacular order win”, notes DBS’s Ho. Some 39% of the orders come from renewable or so-called “cleaner” energy projects, such as three 2GW HVDC offshore converter platforms for the TenneT Offshore Wind Farm Projects in the Netherlands. There is also an agreement to provide Chevron Shipping Co with engineering, procurement, installation, and commissioning services to reduce the carbon intensity of its LNG fleet operations, with completion by mid-2025.
In response to questions from shareholders, Seatrium declines to say when it expects to break even. Analysts such as UOB Kay Hian’s Adrian Loh estimate this to happen as early as the coming FY2024 ending December 2024.
Similarly, citing how it is an “extremely tricky business”, Seatrium refrained from forecasting how oil prices may trend. “We may get it wrong if we try to make a precise prediction. What is clear is that in the current geopolitical climate, the focus is on energy security and transition. Normally, when there is a focus around energy, it will lead to more bullish prospects for oil and gas prices.”
The renewed geopolitical tensions have given Singapore-based yards a new, positive spin. “Some of our customers might be worried about having too much of their supply chain in China. This gives us opportunities. We have great facilities in Singapore and other parts of the world besides China. Customers might find us an attractive alternative,” explains Seatrium.
“Although some of the costs are higher in Singapore, we have very strong capabilities and great facilities here in Singapore. We have many customers who like that we are based in Singapore as we can deliver quality work,” says Seatrium, adding that Singapore has another advantage in the form of a well-established ecosystem of suppliers that can better respond to what the market wants.
Nonetheless, Seatrium, which operates yards in various locations outside Singapore, knows it has to be prepared for various eventualities. “One of the areas in our strategy review is to consider the right operating footprint going forward, including the locations we should be targeting to carry out our activities.”
As Sembcorp Marine, Seatrium rode on the global spike in oil prices to a record of more than US$140 a barrel to report record earnings of $860.3 million for FY2010. Earnings dipped somewhat to $560.1 million for FY2014. However, with the collapse of oil prices in the middle of the previous decade, the company sank into a loss of $289.7 million and struggled thereafter. The worst came in FY2021 when hit by the pandemic; it gushed $1.17 billion in red ink before reducing the losses to $261 million for FY2022.
Seatrium believes that as part of reducing the volatility experienced in the past industry cycles, it is “very important” to diversify and grow its business in the offshore renewables and new energy space, which it expects to be a “much less cyclical” business in the coming 20 to 30 years. “This will provide us with a much more steady growth business that is not exposed to commodity prices in the same way as oil and gas,” it states, reiterating that the merger is a good move. “With a broader customer portfolio and broader supply chain, this would certainly help when managing the business cycle.”
Structural changes
Given the structural changes that are taking place in the energy industry, analysts are careful to note that things are not all “clear and shiny” and that there are plenty of uncertainties lying around. The key risk, naturally, is if oil prices collapse again, which will dampen the momentum of order wins, says DBS’s Ho.
“If oil demand stays intact, we think the oil majors will work as hard as possible to maximise output before the credit market is shut completely. Hence, we think the sector will still hold up for the next 12 months,” says Phillip Securities’ Mak.
She adds that the biggest uncertainty is how the energy industry’s capabilities evolve. For example, if the production of hydrogen, ammonia or other alternatives can become more cost-efficient and if the logistics of delivering these alternative fuels become comparable to the existing hydrocarbon ecosystem, then the fossil fuels that have dominated the world economy can truly be displaced.
“Oil majors have therefore been very cautious in their approach to capex spend in exploration and development. We think investors should also adopt the same approach when considering investments in this sector,” says Mak, who has a “neutral” call on this sector. — with additional reporting by Bryan Wu
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