Will O&M sector's long winter end in 2020?

SINGAPORE's sizeable offshore and marine (O&M) sector may not have lived up to the much-hyped recovery that many investors had expected this year following a prolonged slowdown since the oil slump in 2014 but its two major players - Keppel Corp and Sembcorp Marine - did pull their weight in unexpected ways.

There is always next year. So far the signs are good, with the latest news of production curbs by the Organization of the Petroleum Exporting Countries (OPEC) currently chaired by Saudi Arabia; fewer barrels in the market next quarter will help to support oil prices, imbuing hopes of a recovery for the offshore sector in 2020.

Looking back, 2019 can be considered the year in which Keppel and SembMarine, the world's two largest rigbuilders, finally made peace with investors after they resolved a chief source of anxiety related to the Brazil corruption scandal that had led to frozen orders worth some US$10 billion.

In October, the sector stalwarts reached a settlement deal with troubled Sete Brasil that set them free from a four-year-long overhang. The settlement which also paves the way for the completion of the rigs and drillships which ought to be a boon to their topline and bottom line, with some analysts expecting an even sweeter outcome in the form of potential write-backs.

That same month, Singapore's investment firm Temasek Holdings made investors giddy with excitement when it launched a S$4 billion partial bid for Keppel. Temasek's surprise move was read as an effort to shake things up and restructure the conglomerate's waning O&M business, sparkling speculation of a merger with SembMarine.

The deal's long-stop date of October 2020 could re-ignite enthusiasm over the long-wished-for potential consolidation next year as the date inches closer. This, in turn, could generate excitement among its sector peers as well.

The upbeat news has somewhat overcome earlier disappointment over third quarter earnings reported by Keppel, SembMarine and the latter's parent Sembcorp Industries.

There were also corporate ma-noeuvres elsewhere, with Malaysian tycoon Robert Kuok launching in early November a voluntary conditional cash offer to take Pacc Offshore Services Holdings (POSH) private.

RHB Research is overweight on the O&M sector on the back of stronger orderbooks next year.

For the first nine months to Sept 30, Keppel O&M snagged new contracts worth S$1.9 billion versus S$1.7 billion for the whole of 2018. Some 60 per cent of the jobs are for LNG and renewables-related projects, a sign of the firm's pivot away from an over reliance on oil.

SembMarine's new contract wins for the nine-month period have also been robust, at S$845 million compared with S$730 million year-to-September last year.

RHB Research expects the uptick in new orders to persist in 2020, more so given the expected stability in crude oil prices.

Icing on the cake

The icing on the cake for the sector came last week after Opec and its allies agreed to deeper-than-expected production cuts in the first quarter of 2020 to prop up crude prices amid a looming supply glut.

Crude prices rallied by nearly 3 per cent last Friday in less than an hour following the bullish surprise with benchmarks Brent and West Texas Intermediate (WTI) closing the week at two-and-a-half-month highs. The exuberance has since tapered off with market expectations that Brent is likely to largely trade in the low US$60 per barrel range next year.

Even so, while O&M players may be well past the drubbing of 2014 when crude oil prices plunged from over US$110 per barrel to below US$30 at one point, many analysts have yet to call the upside for the sector. Caution remains thick in the air and the wild card, as with most things these days, hinges on the outcome of US-China trade talks.