Energy shares and shipping stocks took a belting yesterday as oil prices sank to levels last seen in 2004.
The trigger for the decline yesterday came from the continued sharp sell-off in Chinese equities and also the World Bank, which predicted that China's troubles will spill over to emerging markets already hit by falling commodity prices. There are also a wealth of economic concerns and geopolitical issues to factor in, as well as a global glut of oil supplies.
The pessimism sent Brent crude to as low as US$32.16 (S$46.22) a barrel yesterday, its lowest price since April 2004. There was collateral damage for Keppel Corp, which fell 6.6 per cent to $5.82, and SembMarine slipped, down 6.1 per cent to $1.55.
"In this protracted low oil-price environment, we see long-term returns falling drastically," said Mr Somesh Kumar Agarwal, an analyst with Macquarie Capital Securities. "A triple whammy of no rig orders, low quality non-rig orders and customer delays/lack of payment are leading to a decline in returns and balance sheets, in our view.
"Given the new realities and risks that have emerged in 2015, we now think that the Singapore offshore marine sector is in a structural decline and the Singapore yards' business models will be under immense pressure from 2016-2020."
Macquarie downgraded its call on Keppel Corp and SembMarine to underperform.
CIMB Research analyst Kenneth Ng noted that marine firms supplying support services have seen vessel charter rates and utilisation fall, while those with "extended balance sheets are uncomfortably trying to patch things". "Banks' bad debt from these sectors has started to tick up," he added.
New rig orders are not expected until at least 2017. "This has never happened before. Rig orders bounced back within a year during the great financial crisis. But the rig world is heavily oversupplied this time around," Mr Agarwal said.
"There are currently as many as 170 idle jack-up rigs with 117 new speculatively built rigs in the pipeline. After zero orders in 2015, we expect zero new jack-up orders globally in 2016 and 2017, with a likelihood that this drought could extend until at least 2020."
More disturbingly, as much as 70 per cent of SembMarine and Keppel Corp's $8 billion-$10 billion order books are at huge risk of being cancelled, Mr Agarwal said.
"Even if 50 per cent of these orders were cancelled, return on equity would decline to low single digits... which could reduce dividend payouts to negligible levels," he said.
Other oil-related plays hit yesterday included Linc Energy, which plunged nearly 11 per cent or 0.9 cent to 7.3 cents, while Cosco Corp, the shipbuilding arm of China Ocean Shipping Group, fell 8 per cent to 34.5 cents. Shipbuilder Yangzijiang lost 2.8 per cent or three cents to $1.03.
The oil price rout also weighed on soft commodity players.
Noble, whose credit rating was slashed to junk status last week by Moody's, was the most actively traded counter yesterday as funds continued to offload the stock. The stock plunged 9.2 per cent or 3.5 cents to 34.5 cents, with 126.5 million shares traded yesterday.
This article was first published on January 8, 2016.
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