The worst is yet to come for the offshore sector, and the industry faces a tough elimination race, says Kristin H. Holth, Global Head of Shipping Offshore & Logistics at major Norwegian bank DNB.
"Most companies have good contracts this year, but fewer contracts will be available next year, so if this low market continues we will basically see more problems at the end of this year and next year. That's where the true test will be, showing who has positioned themselves well enough," she tells ShippingWatch in regards to the bank's annual report 2014.
Oil price analyst at DNB, Torbjörn Kjus, was one of the first to foresee oil prices dropping. But the velocity and size of the plunge in the last months of 2014, as experienced by most, surprised even DNB. Not least the consequences for the energy market as a whole, says Kristin H. Holth. The development, however, did not affect the bank's results in shipping and offshore in 2014, which according to Kristin H. Holth, was a good fiscal year throughout, with good numbers on the top and bottom line as well as a portfolio of USD 26 billion.
The bank did not release the results for the individual divisions, but made impairments on loans and guarantees for USD 211 million compared to almost USD 290 million in 2013. The impairments in shipping were, according to the bank, reduced in the previous year. Meanwhile DNB had a revenue last year of USD 2.72 billion compared to USD 2.31 billion in 2013.
Low offshore activity will also hit DNB
Although developments in the offshore sector did not affect the bank's activities last year, it could happen this year:
"In 2015 we will see a lot fewer transactions in offshore than DNB has had in recent years. There will be fewer newbuildings as well as less activity in general, because the market is so weak. This will have an impact for all the companies and also for the banks in regards to activity," says Kristin H. Holth, and points to some companies being hit on liquidity since the market is so weak.
On the other hand, this could bring possibilities for others:
"The challenges in offshore will also create possibilities for some companies. So the strong and robust companies will find possibilities in this market, and further down the road, when the dust has settled, they should be ready. There will be companies that might have to enter the equity market and acquire new capital, they will stop paying dividends and they might have to cooperate with other companies. Then you will see M&A activity (mergers and acquisitions), which you see in this type of decline," she explains.
Mergers can generate more business
This might make an opening for more business for DNB, according to Kristin H. Holth.
"Possibilities always arise from sluggish markets, but it will be a while before we find out what is to come. As a bank we have seen this before, its part of a business where its important to be ahead of the challenges, so we can assist our clients as well as possible. Right now there is a lot of insecurity regarding the depth and length of the downturn in offshore."
The tanker sector is currently the most positive market with a solid balance between supply and demand, which has been lifted due to the diving oil prices. This will likely continue throughout 2015, she says, adding that it will hopefully not remain as strong as it is right now, since a moderate market is more sustainable in the long-term, she comments. On the other hand, Kristin H. Holth is reluctant to elaborate on the scenario for the dry bulk markets. The weak 2014 surprised DNB, which had predicted improvements for the year.
"It will take time and many factors must change before we will see an improved market. Its about supply and demand and we are very conservative when it comes to this development."