Singapore’s $24 Billion Wipeout Eats Into City’s Shipyard Base

File photo: REUTERS/Edgar Su/Files

By Jonathan Burgos, Angus Whitley and Kyunghee Park

(Bloomberg) — Customers have dwindled by the week at Indian Masala Hut, a curry stall in Singapore’s shipyard heartland. Manager K. Muralidoss blames the slump in oil rig-building that led to the elimination of thousands of jobs, many held by workers from India and Bangladesh.

“The lunchtime crowd has more than halved,” Muralidoss says, surveying the almost-empty Benoi Road food court, where only four of 12 hawker stalls were open one afternoon last week. As recently as September, he was busy filling orders from companies trying to sate hungry laborers working overtime. “That has come down quite a bit because there are fewer projects being worked on.”

More than $400 billion of proposed energy projects worldwide have been delayed since mid-2014 and pushed into 2017 and beyond, according to consulting firm Wood Mackenzie Ltd. In Singapore, the global center for oil-rig construction for decades, the slowdown contributed to the economy contracting the most in four years in the third quarter.

BP Plc abandoned oil exploration off the Great Australian Bight, it said last week, five years after beginning a search for resources in one of the world’s last frontier regions. BP had previously estimated the drilling program would cost more than A$1 billion ($769 million).

Decisions like this ripple through Singapore’s oil and gas services industry, from Keppel Corp. and Sembcorp Marine Ltd., the world’s biggest builders of oil rigs, to companies supplying anchors, chains and other components, to the eateries feeding an offshore engineering workforce that tripled over a decade to peak at more than 90,000.

More than two years of tumbling oil prices have wiped more than $24 billion from the market value of Keppel, Sembcorp Marine and Singapore’s other listed oil-services companies — or about two thirds of their pre-July 2014 capitalization. Since then, at least 25,000 jobs have been axed and one company, Swiber Holdings Ltd., has defaulted.

“We’ll see more failures within the oil services sector,” said Song Seng Wun, regional economist with CIMB Private Banking in Singapore, in a telephone interview. “Stronger companies, like Keppel Corp. and Sembcorp Marine, will survive and take advantage of opportunities. They have deeper pockets.”

Output in the marine and offshore engineering sector fell 29.7 percent in the first eight months of this year, the worst-performing industry in Singapore, according to data from the country’s Economic Development Board.

“The down-cycles in a few industries like the offshore and marine industries, and the fact that falling oil and commodity prices have dampened demand in the region around us,” Tharman Shanmugaratnam, Singapore’s deputy prime minister, said at a company’s media event in the city-state Wednesday. “But those are short term factors, those are cyclical factors.”

Keppel shares rose 0.4 percent to S$5.37 as of 2:01 p.m. in Singapore, and Sembcorp Marine fell 1.5 percent to S$1.32. Singapore’s Straits Times Index climbed 0.2 percent. The shares have fallen 18 percent and 25 percent, respectively, this year.

Profit at Keppel, which reports third-quarter earnings Thursday, is forecast to slump to the lowest in a decade in 2016. Sembcorp, which posted a 69 percent drop in first-half profit, is slated to report on Oct. 25. Both companies declined to comment on whether more job cuts are likely amid a decline in rig orders, citing a pre-earnings blackout period.

The Keppel Offshore & Marine Ltd. unit has shrunk its workforce by about 11,000 and subcontractor headcount by some 8,600 since 2015, Chief Executive Officer Chow Yew Yuen said in July. The company has trimmed overheads to maintain a gross operating margin at around 13 percent, he said.

Keppel, which began as a local ship repair yard in the 1960s, said it had won more than S$460 million ($332 million) of orders this year when it reported first-half earnings on July 21. Its net order book at the end of June was S$4.3 billion, excluding orders from Brazil, the lowest since at least 2005. The order book has declined every year since peaking at S$14.2 billion in 2013.

Down Cycles

Sembcorp Marine is building a mega shipyard that will give it broader capabilities in building gas storage tanks and offshore production units, Chief Financial Officer Tan Cheng Tat said in July. The company has experienced “several down-cycles and built a strong core to weather the elements,” according to a presentation.

Sembcorp Marine had won about S$320 million of work and its order book stood at S$9.2 billion as of July 28, when the company announced first-half earnings. That’s the lowest order backlog since 2011.

The oil industry may cut spending for a third straight year in 2017 as lower costs kick in and companies continue to grapple with weaker finances because of crude’s slump, the International Energy Agency said last month.

Shrinking GDP

That’s hurting Singapore’s economy. Gross domestic product fell an annualized 4.1 percent in the third quarter from the previous three months, the Ministry of Trade and Industry said in a statement Friday. Manufacturing contracted at an annualized rate of 17.4 percent — the worst quarter-on-quarter pullback since the third quarter of 2012.

The slowdown in the oil, gas and shipping industries is the worst in more than 50 years, said Mike Sim, executive chairman of Sinwa Ltd., which provides ropes, anchor chains, components, and specialized equipment to the offshore and marine business.

“Just as we thought the industry had seen the worst of the shipping downturn, the drastic fall in oil prices and its devastating effect on the entire offshore industry has served as a double whammy,” Sim said in an e-mailed response to questions.

Many oil and gas shipping companies are facing difficulties as they go through “massive cost-cutting,” Sim said. “We may see more consolidation or privatization in the market if this continues.”

Swiber, the Singapore-based firm that roiled the local bond market when it defaulted in August, has been put under judicial management while it reorganizes debt. At least eight companies in the shipping and oil and gas services industry, including Rickmers Maritime and Marco Polo Marine Ltd., are seeking leniency from creditors on their debt load.

“It’s a difficult time, but the challenges aren’t insurmountable,” said Terence Fan, an associate professor of strategic management at the Singapore Management University’s Lee Kong Chian School of Business. “They could use this downturn as an opportunity to realign, rationalize and upgrade their capabilities now that they have a bit of breathing time.”

© 2016 Bloomberg L.P

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