Saturday, 3 October 2020

Is The Oil & Gas Industry Really Hopeless?

This blog was started in March 2014 with the thinking that perhaps I am the only “dirty offshore oil” financial blogger here, who is in the business. Back then, oil price was high and businesses were phenomenally good. Many offshore oil-related SG listed entities were thriving, and many readers were eager to invest into them. 

Read my first O&G post: Oil and Gas / Offshore & Marine Stocks in Singapore 

TWIST OF SENTIMENTS

Today, there is a dramatic twist in sentiment. This is triggered by the tumble in oil price after mid 2014, followed by the collapse of many local companies. 

Ezra, Swiber, and Ezion were once local darlings with over billion dollars market cap. The former two went into administration while the latter is struggling to keep afloat. Many others such as Swissco, Otto Marine, Jaya, KS Energy Kris Energy, Marco Polo, Pacific Radiance, ASL Marine, Falcon Energy, Vallianz, Viking Offshore, Nam Cheong etc, all had similar disastrous fate. These homegrown companies were/are heavily ladened with debts and had either collapsed or been financially distressed since the oil crisis. 

Anyway, the above-mentioned companies can be easily forgotten, but not the losses of Keppel O&M (KOM) and Sembcorp Marine (SCM). Both are popular investment counters in SG and have comparatively more shareholders, who are crying foul today! 

While we are complaining, many seem to forget the heydays when KOM and SCM were earning so much money from 2004 to 2014. Ok... we are investors... Duh!!! If we consider average yearly earnings for the last 15 years, both companies still make a lot of money!  Back then, no one will dispute that O&G or O&M is a lousy business. Everyone is trying to get into the industry, including local authorities setting up new marine and offshore courses in University advocating fresh graduates to join. Remember that there is even a Media Corp TV Series featuring Rig/Ship building business in Keppel. 

OIL & GAS IS CYCLICAL 

Just less than a decade later, we labelled the industry as hopeless. Hmm... we tend to go where the wind is blowing. It is sad! This mindset will never be able to get us into the forefront of thing, and we will always be tailing rather than leading. 

All veterans in the industry knew that the Oil and Gas / Offshore and Marine sector is cyclical. Below is an inflation adjusted oil price chart. 

 

Source: macrotrends.net

1970s saw OPEC embargo and also advent of oil exploration technologies leading to more oil being discovered.  Hence, the big spike in oil price. The over hyped oil price led to greed and oil glut. Collapse in the mid 1980 became inevitable.  

Oil then peaked again during 1990 Gulf war for the fear of oil supply crunch, before declining in the next decade hitting all time low in late 90s. 

Within a few years, oil price more than doubled before being impeded by Sep 11, 2001 crisis. Thereafter, oil steadily rose and hit all time high above USD150 per barrel in 2008. Everyone in the industry is partying. Then the unprecedented Global Financial Crisis (GFC) came and oil collapse. 

The rebound is quick since GFC is financial in nature, and it was forgotten quickly. The complacent and FOMO mindsets set in again. Oil rose quickly above USD100 until mid 2014, before the over speculation and supply of oil sent so many companies packing their empty suitcases.  

Hence it is clear that in general, O&G business is cyclical and will never be able to satisfy the insatiable desire of investors who only always want growing returns every year.  


GOOD COMPANIES IN THE “HOPELESS” INDUSTRY

While there were constant laments about this hopeless industry due to losses KOM and SCM incurred, there are many companies still doing well locally. 

BW Group (BW Offshore), Modec and Yinson are few examples. These three companies have Offshore HQ in Singapore employing thousands here, controlled by foreigners and grown by foreign leaderships in SG. The oil crisis has not stop them from sustaining, innovating or growing the business, let alone exiting the business!

Yinson in particular was in 2014 still a relatively small Malaysian-owned Offshore Support Vessel (OSV) company, much smaller in size compared to many SG O&M listed companies. The difference is, Yinson has the vision and capability to venture into oil production (FPSO) in 2014 and had since grown into a much-acclaimed player in the international Oil and Gas market today. 

PRIVATE OWNED VS LISTCO

In the international arena, there are more good companies still sustaining well in the industry, and planning for long term growth. They are normally privately owned with a long history. 

The leaders are in the industry for a long time and have good knowledge of the business, the product and the cyclical nature of the market. They have vision, invest, R&D and plan for long term, and are concern about the environment. They are not aggressive with debts when times are good, and not beaten when times are bad, and continue to sustain for decades or even century in the marine and offshore industry. 

Allseas is one O&M Dutch-Swiss company I know, that has spent over 25 years to conceptualize, design and build a >USD2 Billion vessel named “Pioneering Spirit” (Refer here) creating technology disruption within the industry. The company did not crumble in the midst of the crisis, and is always in the forefront of the industry looking for innovation and breakthrough, as well as profitable. 

It has become apparent that many public listco nowadays prefer to appoint CEO that comes from “finance and investment” background. Typically, many of these companies tend to focus only on short term “dollars and cents”, and fail and invest and innovate in the longer term. 

 

SHORT TERM MINDSET STEREO-TYPING “SUNSET” INDUSTRIES

I hate to say this, but it is a fact that, 

“The general mindset of Singapore business environment is such that during good times, we tend to take for granted and become complacent; and during bad times, people lament and complain, instead of learn, improve, innovate and sustain. Most solely care about their own benefits (making money for themselves in the shortest possible time), disregarding the sustainability of the business that will otherwise provide for long term employment and for the overall well- being of the industry.”

Once upon a time, shipping use to be very lucrative and Singapore’s core business, but today it is considered dead and hopeless in Singapore. Just look at NOL, and PIL. 

Likewise in the Electronics industry thriving in the 90s, where Singapore is in the forefront of things. We use to have Seagate, Tech Semicon, ST Mirco, Panasonics, Philip, ST Micro etc all doing well and earning good money in Singapore. Then Singapore started our own Chartered Semi-conductor that is the biggest disaster and keep losing money for years before selling to Middle East owner into what is Global Foundries today. Flop!!! 

Then, we are in eager mode of economic growth and cost in Singapore escalates making manufacturing not feasible anymore. In the 2000s, electronics “so-called” became the  “sunset industry”, and we abandoned them. How about Taiwanese and Korean Semi-conductor companies? Are they still thriving TODAY in the hopeless sunset industry? 

Marine O&G were the sunset industry in the 80s and 90s, and look at what happened from 2000 to 2014? Now they are classified as sunset industry and we are trying hard to exit the business. 

Aerospace industry has experienced many good years since inception in Singapore. Today, because of Covid, it may be deemed as a “hopeless” industry too! Similarly, Telco companies (Singtel, Starhub and M1) that use to generate so much profits are becoming “hopeless” because they are being displaced by the innovative tech companies such as Netflix, Amazon (Prime), Google (youtube), Facebook (whatsapp) etc. 

In a matter of time, maybe REITs and Banking will become hopeless industry too! Then, what industry is left in Singapore that are not hopeless? 

LACK OF CREATIVITY AND INNOVATION IS HOPELESS!

So, ask ourself this question. Is the industry hopeless or is it because the company is short-sighted lacking vision, and fail to innovate?   

Norway is a country deriving a lot of revenue from O&G, and has had an economy sliding due to low oil price. That said, the Norwegians are never worry. They told me, 

"why should we worry about low oil pirce? We should be worry about lack of creativity and innovation! We are sustainable, and have so many unexplored oil that can still last for generations and generations. We are not in a hurry to drill all the oil that will reap the profits only for this generation.” 

No growth during a short period of time, does not always equate to lousy! Norway has many happy people with incredible social benefits. They care a great deal about the well-being of employees, creativity and the environment. 

ROLF’S FINAL THOUGHTS

Having been in this so-called “hopeless” industry myself for close to two decades, I have never regretted. I am still grateful today despite the downturn. To date, the first half of my career is exceptionally good. The second half is NOT as good, but at least it has sustained my livelihood decently and I am still in the business today. 

Read: Rolf's Salary and Income Report Analysis – 2004 to c2020

In this industry, I have learnt a great deal in all aspects of business (finance, sales, engineering, production, services etc). In addition, meeting so many wonderful people all around the world, to me, is perhaps more valuable than having a better paying job in a better sector without these experiences. 

Going through and successfully overcome the 2003 SARs, 2009 GFC, 2015 Oil crisis and hopefully this crisis as well, makes me a tougher and a better person. Crisis is the best time to learn! 

Read: 

Crisis? We should be happy because it is the best time to learn!

Oil & Gas Crisis – Time to Take On More Work Even with No Pay Raise!

Perhaps one day I will exit the industry. However, it is not because the sector is experiencing a downturn. The primary or secondary reasons must be because I am no learning that much anymore or the harsh reality of the sector within Singapore pushing me out inevitably. 

Is the oil and gas industry really hopeless with no more future? I am not so sure! 

BUT one thing I am sure that will make a company hopeless is the failure to innovate and improve!


6 comments:

  1. In 70s, Keppel and Sembawang were doing well in shipbuilding; then transit from sunset shipbuilding in Singapore to O&M. After O&M, can they evolve successfully and reward long-term shareholders?

    During Keppel Retail shareholders Day; I saw so many seniors there! Could be very long-term shareholders?

    ReplyDelete
    Replies
    1. Hi CW,

      In the old days, Keppel is lucky to have Mitshibushi (Japan) and Far East Levingston (FELS from USA) leaving behind the ship and rig building technologies to us. 2014 oil crisis drove out so many people with expertise. Not sure how much is left to evolve?

      2002 to 2014, Keppel is still doing well in shipbuilding (SB). The transition is from Merchant ships (old days 80s) to Offshore ships (2002-2014) that is making Keppel lucrative. But still SB. That division is called Keppel Singmarine. Keppel Fels is the Rig building back then. Then you have FPSO conversion and repairs (Keppel Shipyard). Now they combined.

      I know there are many long term loyal shareholders of Keppel. It is actually a very good company during the good times of the cycle. Oil and Gas is cyclical as I mentioned in previous article, n hence companies in cyclical industry is better to be private owned so that they can invest and plan long term. Listco need to satisfy the thirst of investors even during down cycle.

      Hence, personally I think the best option is to exit O&M and privatize KOM! It will be good for KOM and good for Keppel shareholders

      Delete
  2. The problem is SG tries to be a hub of everything and ended up good for nothing. We gave up on semiconductor industry prematurely whereas the Koreans and Taiwanese pressed on and scale up the technology ladder. Now semiconductor industry is booming again but alas many talented engineers have already left the industry due to our lack of persistence. Hoping for instant success by flooding the industry with loads of foreigners is merely wishful thinking.

    ReplyDelete
    Replies

    1. Hi Wb,

      I agree with you. It is very difficult that we are good in something, because we want the fastest result in the shortest time. This can only achieve at the expense of sustainability over long term! Therefore, we will never be good in any industry or trade.

      We can only keep on be friendly to foreigners and attract them here. But eventually this method will not work and we will be at the end of the road.

      We governed the country like a company (meritocratic and very little compassion), and cares more about current or recent results. Survival is often use as a reason to “scare off” people, who does not know there are countries who are small and yet have compassion and yet doing well.

      People in SG whether citizens, PR or foreigners are tools to help the country prosper. The result that is imprinted in the year-end report card is all that matters. Once, you are unable to help the country prosper even if you used to do it, you are considered “inefficient resources”. Then you are disposable!

      The problem is majority of Singaporeans do not recognise that too, because we too being in the same environment. We also only want instant success! Anyway, below articles are relevant to this topic.

      https://www.rolfsuey.com/2020/09/is-singapore-economy-in-danger-for-long.html

      https://www.rolfsuey.com/2020/09/is-singapore-economy-in-danger-for-long_13.html

      https://www.rolfsuey.com/2020/09/singaporeans-dont-lack-entrepreneurial.html

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  3. Hi,

    Make hay while the sun still shines. Such approach is relevant for one in any business and industry.

    WTK

    ReplyDelete
    Replies
    1. Hi WTK, make the hay while the sun still shine is correct. But make the hay only once and think that the sun will not shine again, and not prepared or improved before the next sun rise is still relevant?

      Anyway Sun rise and Sun set. Have you ever seen our Sun set and never rise again?

      Delete