Sunday 3 March 2019

How Singapore's Soverign Wealth Fund may cause further damage in the local Oil & Gas industry and eventually Job Losses

I have been reading up on the recent annual reports and financial companies as this is the usual time of statement release. There has been some interesting observation. However one of the most pertinent is what I am seeing is in the oil & gas sector. Below are just purely my views on what may happen in Singapore's Local Oil & gas industry and readers should not just depend on it for investment decisions.

Temasek is trying to profit from the situation and not acting as a backstop

This is my first and most important observation. While we have seen our sovereign wealth fund (SWF), Temasek, putting money into local oil & gas company recently; from what I am seeing Temasek is not acting as a backstop to stabilise the industry but are actually trying to profit from it. One observation is from Marco Polo Marine. On February 2018, it was announced Pavilion, a Temasek Subsidiary, had bought a stake in Marco Polo Marine (MPM):

However when MPM released its latest annual report in 2019 , Pavilion fund appears in the top 20 with a diminished stake from 5+% to 0.93%. All this points to the thinking that our SWF is not going to act as a backstop to the ongoing oil & gas weakness in Singapore. They are in the market to profit and not stabilise the industry which is an economic backbone to our country.

Annual Report showing Pavilion Stake in Marco Polo Marine has reduced from initial levels

I understand Pavilion too has bought a stake in Ezion which would have placed it in the top 20 with a 4.43% stake. I am willing to venture that in Ezion's latest annual report, Pavilion would have a much lower stake. Even accounting for the equity dilution etc, Pavilion stake in Ezion should not fall below 3%; however my sensing is that Pavilion has offloaded stake in Ezion to that of below 3% to profit on the situation 

Banks are probably spooked due to low oil prices and SWF's Actions

As seen from the many announcements made on the SGX, a few oil and gas companies are not receiving working capital funding from banks for their businesses. As AQ from valuebuddies has put it: 

Over the past 3yrs, Sam Tsien (OCBC CEO) has been consistently saying that he does not see a "recovery for the OSVs unless oil >60 consistently. This is significant not because he is a great forecaster, but cos he is OCBC's CEO i.e. banks will not lend for oil<60.

Brent bottomed out ~30 in 2016, spent 2017 in 50s, broke 60 in 2018 and hit 85 on 1Oct18. Analysts called for $200 oil.
2nd Oct - Jamal Kashoggi got murdered and oil fell back to 50s and is hovering ~60s now.

For until Trump shuts up and OPEC acts led by Saudis, oil will find it hard to rally, and thus banks will not lend. Unless O&G players intend to fund capex, working capital etc solely out of equity, demand will not pickup. i.e. it all boils down to oil price.
I suspect the consortium of banks were willing to refi Ezion in 2017-2018 thinking oil bottomed and perhaps thinking state support, but now reluctant since oil collapsed and Temasek ended up being flippers."

The persistently low oil prices and actions of our sovereign wealth fund is causing a credit crisis in our local oil and gas industry

What Happens Next?

Below is my own opinion. It is likely we are going to see more defaults among the SGX-listed companies. This will range from ASL marine asking for more haircut among bondholders to Falcon Energy probably undergoing another round of dilution. Indebted companies in the oil & gas will continue to flounder and more job will be lost.

It is true that oil prices has indeed recovered. But let's be honest, banks here are still not willing to lend. In 2008 our Sovereign wealth funds entered the financial markets and acted as back stopper, via buying and holding onto their stake. This sent a strong signal to the market the worst is over and banks started to lend again; however currently, the actions of our sovereign wealth funds being vultures attempting to profit, instead of a back stopper is likely to cause a credit event in the oil & gas industry. The worst is not over and we can expect more job losses in this industry. I too am bracing for more defaults and equity dilution in one of the largest industry in Singapore.

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