SINGAPORE (Apr 16): Phillip Capital is of the view that Singapore’s oil and gas (O&G) sector is facing an extended period of soft conditions.

To begin with, banks have now become the de facto owners of vessels, rigs and other facilities taken over from loan defaulters, and are now facing difficulty in disposing of such assets, in the research house’s view.  

“Such assets operate under minimal positive cash flows and managed by either third party operators hired by banks/creditors or the original owners. Assets that should have been scrapped remain operational and have prolonged the supply imbalance, in our opinion,” notes analyst Chen Guangzhi in a sector report on Monday.

While Chen acknowledges a modest recovery in upstream production activities, he points out that rig count has come back down in 1Q18 after a moderate increase over 2H17, suggesting that sector activity remains depressed.

Looking ahead, he expects the eventual improvement of capex on exploration and development, although such drilling activities may only resuscitate from early-2019 onwards.

Another concern is the oversupply of offshore support vessels (OSVs) given how the OSVs that have found work are predominantly under short-term contracts of 1-2 years, as owners have declined long-term contract offers to avoid being locked into low rates.

In Chen’s view, the 1Q18 spike in the number of OSVs sold for scrap also signals some deterioration in oversupply conditions.

Nonetheless, he thinks demand for OSVs will return as oil companies increasingly need drilling work to replenish their reserves and step up any delayed maintenance work.

“Until such an environment returns together with the further scrapping of vessels, any meaningful rebound in rates or utilisation will be elusive,” states the analyst.

Lastly, Chen foresees the return of an oil glut following its price rally.

This comes after Brent prices climbed back to a three-year high of US$72/bbl on the back of geopolitical tensions, dwindling supply, the OPEC supply freeze and Saudi Arabia’s hopes of bringing prices back to US$80/bbl.

“[The oil price rally] was in line with the reversal of the three-year inventory glut (3Q14 to 3Q17). Since 1Q17 inventory has seen continuous drawdown, underpinning the recovery of prices, according to EIA’s Short-Term Energy Outlook in April. However, we expect the fastest phase of the inventory decline is over, and any momentum in crude oil prices will taper off,” he concludes.