Don't buy shipbuilders, oil and gas services companies!

If someone were to ask me, whether do I think it is a good time now to pickup shares in Nam Cheong or Ezion, I would definitely say no. Let me explain.

Firstly, demand for their products and services has almost become non-existent. The was a boom in new offshore supply vessels and Nam Cheong probably benefited over the last five years leading to its public listing. However, with deliveries still taking place globally amidst the low oil price, there has been no new orders. For Ezion, the demand for its offshore maintenance services is recurring but I believe several of the oil and gas companies have announced budget cuts and will try to manage their operating expenses by either changing their maintenance regimes or asking for lower dayrates.

Secondly, there has been an oversupply situation in both the products and services markets. All the vessels that have been ordered over the last five years are coming online and this will depress the charter rates these vessels can obtain. When charter rates are lower, there is less incentive to order new vessels as the rate of return on these vessels have fallen. The same would apply to Ezion. There is an increase in the number of vessels, the lift boats, which can support offshore maintenance work.


Finally, as a result of the demand and supply, market balance is not favourable to these companies and this will lead to a downwards pressure on utilisation and then on day rates. All vessel and liftboat owners fear low utilisation rates because it means that their assets are not making money but losses idling in the yard. These owners will have to pay their crew to be on standby. It is thus likely that lower dayrates will be fixed so as to keep their assets working. The alternative of course is for the owners to scrap the older vessels and liftboats but this will apply to owners with very old fleet.

You might point out that I should not paint such a bearish picture of the sector since I am invested in the oil and gas sector through my recent purchase of KrisEnergy. However, I would like to point out that KrisEnergy's business is in the upstream. When oil prices are low, KrisEnergy will also suffer with the rest. But as long as oil prices recover to a certain level, say USD 60-70 bbl, the company should make some money. Oil and gas companies may try to manage costs to improve on their profitability.

This will be less so the case for shipbuilders or oil and gas services company because they are suffering from oversupply. Any uptick in oil prices may not increase the demand for new vessels given a surfeit of them. For the services company, competition may prevent day rates from recovering to pre-crisis levels.

Personally, I feel that the worst of the sector has yet to come. No one really knows how long oil prices will remain low. I guess that there will be consolidation in the market as some of the E&P, shipbuilders and services companies face financial difficulties. That is another story altogether.