Downstream oil & gas on a downtrend

Recent remarks from the governmentmay hint no more green-field refineries in Singapore, says OCBC.

Downstream oil & gas companies, Rotary Engineering and PEC Ltd will report their 2QCY12 results next month

and OCBC Investment Research expects relatively weak financial performances from both companies.

The sector, it said, has been experiencing severe pricing competition amidst a shortage of local large-scale petrochemical project works.  

OCBC further noted that a quick turn-around is unlikely.

"Recent comments from the Economic Development Board (EDB) – the lead government agency responsible for attracting energy investments – have also been telling. When asked for an update on a refinery plan, EDB’s deputy director of energy and chemicals said1, “EDB does not have a specific aim of attracting a green-field refinery investment at the moment … the focus is on upgrading the complexity of these [current] refineries,” it said.

Here's more from OCBC:

We believe the sector profitability will continue to remain depressed. In the last quarter, operating margins for Rotary and PEC were 0.83% and 1.82% respectively. Outside our coverage, Hiap Seng Engineering and Mun Siong Engineering reported 1QCY12 operating losses of S$1.2m and S$180k respectively. Although margins may recover over the medium-term horizon, we have yet to see any meaningful catalyst. For now, the companies still lack the scale and bargaining power (against oil companies) to push prices upwards.

Investors should also watch out for any unexpected delay on Rotary’s Fujairah project and PEC’s unresolved claim on its Rotterdam JV. To- date, PEC has taken S$11.2m of provisions against S$18.3m of outstanding claims. Depending on the outcome of its negotiations with Verwater (its JV partner), PEC may need to write off further losses.