Plunging oil prices hit workers in marine sector hard

The retrenchment letter handed out two months ago to oil industry engineer Mr Tan (not his real name) hardly came as a surprise, given the turmoil in the energy industry .

He said: "The company had started giving out these letters since the middle of last year. In some ways, I did see it coming, although I was still hoping for better."

The 26-year-old Singaporean, who had spent four years at a foreign offshore drilling company as a compliance engineer, adds that he was aware other drilling firms like Noble Corporation and Maersk Drilling were already letting go of staff much earlier than that.

His job - designing oil rigs - appears to have lost relevance in recent months, as drilling activities worldwide go on hold amid the slide in oil prices. Not a single rig order has been lodged in Singapore in the past year.

Mr Tan's situation is a microcosm of the pain affecting the offshore and marine sector here, as oil majors continue to slash capital expenditure while announcing job cuts in sweeping numbers.

The rig-builders are clearly seeing dramatic repercussions from plunging oil prices.

Keppel Corporation has continued to take a hit in earnings due to its rig-building arm. Net profit for the year ended Dec 31 dropped 19.1 per cent to $1.52 billion from a year earlier, while revenue sank 22.5 per cent to $10.3 billion.

The conglomerate has also made a hefty $230 million provision for potential write-offs in Brazil, where its client Sete Brasil is teetering on the edge of bankruptcy. It has reduced its global headcount by 6,000 and its Singapore sub-contract workforce by 7,900.

Worse could come, noted Maybank Kim Eng analyst Yeak Chee Keong in a report last month.

He estimates that KepCorp may need to write down as much as $1 billion while Sembcorp Marine faces a $900 million writedown, with more than half relating to non-Sete Brasil contracts.

Still, Mr Chow Yew Yuen, chief executive of KepCorp's offshore and marine business, remains positive about the industry's long- term fundamentals.

He said in a statement that the group expects oil prices to "eventually reach a sustainable equilibrium, driven by higher energy demand resulting from global economic development".

The far-reaching impact of low oil prices has not spared smaller players. Some, such as shipbuilder Vard Holdings, have turned to diversifying their business to stay afloat.

Executive vice-president Holger Dilling notes that the significant reduction in exploration and production activities has put a strain on its core business. The group saw only six new vessel contracts last year, "most of which were for clients outside of our traditional home market or in non-offshore-related segments".

As a result, Vard is turning to other specialised vessel segments which can "make up for some of the shortfall in new offshore orders", says Mr Dilling, pointing to the fisheries and aquaculture market.

Mr Ajay Mirchandani, head of ASEAN energy, oil services and utilities research at JP Morgan, notes: "In some cases, diversification will enable companies to offset (oil's) impact on sales and earnings."

Meanwhile, analysts agree that more mergers and acquisitions are on the horizon.

A recent survey of 200 senior executives across the oilfield services industry found that 70 per cent are actively considering an acquisition within the next year.

ABN Amro equity research analyst Thijs Berkelder says: "In a downturn, it is up to the strong market leaders with strong balance sheets to recoup lost market share and to consolidate the market by buying up distressed quality assets at a discounted price."

The road ahead, however, is a long one. Mr Berkelder expects to see "a further substantial decline in new project demand" across the industry this year, with oil prices likely to stay low.

As for Mr Tan, who is armed with a double degree in naval architecture and business, he plans to take a break over the coming months before moving into a different job within the industry.

His worries are more for his older colleagues. "They've been with the industry for years, so it's going to be very hard for them to translate their skills into a different area.

"At least they were paid well when times were good, so they can afford to take the year off for now."

This article was first published on Feb 1, 2016.
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