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OCBC: Rig Oversupply; Offshore Marine Remains Weak
Aspire, Investments | 09 July 2015
By: Vance Wong
Articles (74) Profile

Crude oil prices had been dipping till recently as summer approaches, with China, India and Europe being the major consumers. As the supply glut of crude oil worsens, the demand for rigs decreases, hitting the offshore sector.

OCBC’s research shows that US had cut their oil rigs early this year by more than half, compared to September last year. While this was good news for the sectors that buy large amounts of oil, the outlook for the offshore sector seems bleak.

Capex Cuts; Rig Oversupply; What’s Next?

OCBC feels that the 1Q2015 earnings results were a good gauge of how badly the offshore sector is faring right now. In short, upstream activities have reduced significantly because of the oil prices.

2015 planned capital expenditures (capex) were reduced by approximately 25 percent relative to 2014 levels. This directly impacted the offshore players in terms of revenue and making their order flows stagnant.

Given that offshore businesses have significant fixed costs because of shipyards and Offshore Supply Vessel (OSV) fleet, revenues were hit badly. Furthermore, many industry players invested substantial amounts into expansion projects during the previous bull market.

As such, the offshore landscape is suffering an oversupply of rigs and certain OSV types. In particular, fleet charter businesses are facing a huge problem with pricings. Shipyards and rig builders are better in the sense that they have backlog orders to soften the impact.

However, this is not considering the risks of order cancellations and declining demand over the mid and long-term. A near-term problem that is already affecting the players is order delays, which also weakens their revenues and earnings.

Oil & Offshore Marine Outlook

The recovery of oil prices will continue to depend on the near-term demand. As such, OCBC’s outlook for crude oil remains slightly pessimistic as it downgrades WTI and Brent to $65 and $70 per barrel respectively.

Even then, OCBC points out that the global crude oil supply glut caused some players to build storage inventories. This is one of the strategies used by oil producers during times where oil prices were dipping. While this helps with cutting losses, the crude oil supply glut will take a longer time to clear.

According to OCBC, both the oil and offshore marine sectors are not attractive areas of interest for investors right now. Nevertheless, the Organization of the Petroleum Exporting Countries (OPEC) is optimistic about global demand for crude oil in 2H2015, as global economic growth is increasingly getting healthier.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.

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