Oil and gas: there will be blood

The sector has seen a string of defaults and more are sure to follow. But one executive in the industry tells FinanceAsia the turmoil has created a $1 billion opportunity.

Watching the turmoil in the oil and gas sector, Raymond Sit sees opportunity. Talking to FinanceAsia in the wake of rising liquidity problems in the sector, the chairman of Brightoil Petroleum says he is now on the look-out for acquisitions among struggling companies.

He is going to be spoilt for choice.

When Brent crude oil was largely trading above $100 a barrel in 2012 and 2013, Asian oil and gas companies sold $117.2 billion of bonds, according to FinanceAsia’s analysis of Dealogic data. 

For banks and investors, this was a welcome source of returns. But since the oil price crashed in late 2014, these investors have taken a step back. After so long without respite, Asia’s smaller oil and gas companies — most of them based in Singapore — are increasingly struggling to survive under the weight of their debt. They have $37.7 billion of bonds maturing next year.

Savvy executives like Sit, who look for opportunity when others are running for the exits, may see this as good news. But it is terrifying for Singapore’s wealthiest investors — since it was them, more than anyone, that facilitated a rush to the bond market by Asian oil companies.

Falling price, rising problems

There have been 29 defaults in the oil and gas sector this year, according to a report by S&P Global. This includes Canada-based oilfield services company Tervita and US-based Breithburn Energy Partners. But the problems have also spread to Asia.

Swiber, a Singapore-listed marine engineering company, defaulted on a coupon payment in August. The company was hit by a slowdown in its business, including the delay of a $710 million oilfield project in West Africa. 

Swiber, valued at just over S$50 million ($37 million) before trading was suspended, surprised the market in late July after it initially filed for liquidation as it struggled with hundreds of millions of dollars of debt. 

The company later changed its plan to judicial management, which gives investors a better chance at getting their money back. But investors in Swiber still face a prolonged period of uncertainty about how much of their investment they can recoup. The company still needs to repay S$460 million of Singapore dollar-denominated bonds and Rmb450 million ($68 million) of renminbi-denominated notes.

Swiber’s story is, unfortunately, all too familiar. Some Asian oil companies, in particular smaller service providers, are struggling to deal with the prolonged collapse in prices. But this problem is being exacerbated by greater yield demands by investors — and their increasing unwillingness to roll over debt.

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“The problems faced by the industry have already been brewing for the past 18 months and credit deterioration among industry players were well noted,” a Singapore-based credit analyst at Nikko Asset Management told FinanceAsia, adding that investors needed to be adequately compensated for the deterioration in credit quality.

This puts Asian oil companies in something of a Catch-22 situation. They need to pay up for funding due to weaker revenues. But weaker revenues mean they cannot afford to raise their funding costs.

Singapore’s high net worth investors are being particularly hard hit by these problems.

While Singapore’s banks will certainly be trying their best to figure out how to reduce their loan risk, high-net worth investors in the market have taken around 80% of bonds in the sector, according to estimates by analysts and investors.

They should not expect the problem to get easier any time soon.

Small is not beautiful

“I would expect there are further defaults coming from the oil and gas industry, particularly the small, independent companies if the price of oil stays low for a prolonged period of time,” Sit, of Brightoil, told FinanceAsia.

Brightoil is one of China’s largest privately-controlled oil firms and has storage facilities in Singapore. The Hong Kong-listed company is now looking for acquisitions in the environment of low oil prices, said Sit.

Perhaps unsurprisingly, Sit did lament that the Swiber incident was bad news for the oil business. But at least he can see the silver lining, telling FinanceAsia that his company will invest as much as $1 billion in oil and gas assets as it bets on a recovery in the price of oil. 

Few bond investors have reason to be so positive. A swathe of small oil companies have followed Swiber in either defaulting, or at the very least publicly acknowledging their problems. 

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Rig and vessel chartering group Swissco said it was seeking to restructure S$100 million worth of bonds in October. Rickmers, a Singapore-listed shipping trust, has proposed a debt-equity swap to its creditors, asking them to take a drastic haircut of as much as 60% off the face value of the bonds. Perisai, a Malaysian service provider listed in Singapore, defaulted on a S$125 million bond in early October. These are just a few examples.

“There is hardly [any] oil company which has not been affected by the current challenging operating environment,” Michael Lum, a Singapore-based underwriter at insurance firm Beazley, told FinanceAsia. “The question remains … if the recovery takes longer than usual, where will the heavily leveraged borrowers find the cash to repay their loans?” 

There is some hope for these companies. Bond investors and bank lenders may know that they have little choice but to accept maturity extensions, and Lum said he had seen increasing examples of restructurings going through. 

It is clear, however, that for Asia’s oil and gas sector, the pain is far from over. 

¬ Haymarket Media Limited. All rights reserved.
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