O&M

O&M: More debt restructuring going forward?

Bloomberg reports that some oil companies which have so far been spared from the wave of defaults in the oil industry are beginning to approach creditors to revise their credit terms, with three companies this month, namely Dyna-Mac, Ezra and Pacific Radiance, seeking to alter certain debt limits or profit targets, as contract delays weigh on earnings.

Analysts are guiding that should the oil markets continue to remain depress beyond 2016, we are likely to see more players attempting to restructure their bonds, with delivery deferrals and provisioning by yards impacting on cash flows.

The last year has seen the debt-to-equity ratio of Singapore listed oil companies rising to 73.1% from 68%, with average cash holdings down 43.1% to US$165m.

Analysts added that more than half of SGD bonds that has yields of above 10% are from the oil services industry.

Maybank-KE opines that a turnaround in the O&M industry seems to be far off as even if oil prices recover from its current depressed levels, the industry will still need time to mend their balance sheets before resuming spending.

In light of the above, the house is cutting its industry FY15-17 earnings by 9-18%. Although valuations are depressed, it does not contend that investors should buy in now.

However, if investors are looking to gain some exposure on the industry, the house’s top buy remains Ezion (Buy; TP: $1.28) while its top sells include Sembcorp Marine (Sell; TP: $1.75), Nam Cheong (Sell; TP: $0.12), and Vard (Sell; TP: $0.22).

In terms of pair trades, the house recommends investors go long on Keppel Corp (Hold; TP:$7.70) and short Sembcorp Marine.