Oil and Gas Industry Check-Up: Higher Oil Prices, But No Business Pick-up in Sight

The oil price rout is closing in on its third anniversary.

In 2014, oil prices traded at over US$110 per barrel. But by the end of 2015, oil prices had fallen below the US$40 per barrel mark.

2017-04 Oil Prices
Source: NASDAQ

Since then, oil prices have recovered to a level higher than US$50 per barrel. While the rise in oil prices is a welcome sign, the consensus among the operators in the oil and gas industry appear to be less sanguine.

A view from the trenches

In its 2016 fourth quarter earnings report, Keppel Corporation Limited (SGX: BN4) acknowledged the increase in oil prices. Its chief executive officer, Loh Chin Hua, said:

“A key development at the end of 2016 was the decision by oil producing nations, both in and outside OPEC [organization of the petroleum exporting countries], to reduce output, the first cut in over a decade.

This brought renewed optimism and confidence to the industry, with oil prices rising to around US$55 per barrel, double the price seen a year ago.”

But, higher oil prices have not translated into higher revenue for Keppel Corporation. Loh explained:

“While spending by oil majors is expected to increase, we do not envisage a quick recovery for the offshore business, which continues to be under pressure from weak utilisation of the existing operating fleet, coupled with a supply overhang of newbuilds. We are thus prepared for the challenging conditions in the offshore business to remain for some time.”

Wong Weng Sun, Loh’s peer at Sembcorp Marine Ltd (SGX: S51), appears to have the same thoughts. He cited intense competition in the space amidst a shrinking market during Sembcorp Marine’s 2016 fourth quarter earnings report. Wong said:

“Day rates and utilisation levels for existing rigs remained at cycle-low levels.Competition intensified as players competed in a shrinking market for orders. With financial players holding or withdrawing their exposure to the sector, the resulting lack of financing posed further challenges for all players across the value chain.”

Elsewhere, DBS Group Holding Limited (SGX: D05), a financier for many oil and gas companies, also shared similar views on the business conditions for the oil and gas industry. Here are some pertinent comments from DBS Group’s chief executive, Piyush Gupta, during the bank’s 2016 fourth quarter earnings presentation:

“I think at current – it’s hard to say where oil prices will wind up – range of oil price estimates – I’ve seen them from $55 to $75 – but if you figure oil prices hanging at around the $60-odd level, it’s not clear to me that that will attract a lot [of] new investment in the exploration side of the sector.

And so I think, at that level, you need oil prices sustained for a longer period of time before investment starts coming back.”

So, this seems to be where the industry stands at the moment. There may be better days ahead, but those better days do not appear to be in sight at the moment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.