Lamprell issues warning as oil slumps further

Many large integrated oil companies as well as smaller exploration and production outfits have already said that they plan to curtail their spending this year after oil prices suffered one of their steepest ever declines.

Lamprell employs about 10,000 people and its primary facilities are in Hamriyah, Sharjah, above, and Jebel Ali. Jaime Puebla / The National
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Lamprell, the London-listed oil services company which has its operational head office in Sharjah, warned shareholders yesterday that earnings would be hit by the weakening oil market. The warning sent the company’s stock tumbling as much as 16 per cent.

Many large integrated oil companies as well as smaller exploration and production outfits have already said that they plan to curtail their spending this year after oil prices suffered one of their steepest ever declines.

Oil prices posted further sharp declines, with benchmark North Sea Brent crude down about 3 per cent, or US$1.52, at $48.59 per barrel. The cumulative loss for Brent since last June’s high above $115 per barrel has reached 58 per cent, the lowest price since late 2008.

“The announced reductions in capital expenditure from many operators are already having an impact on global markets and are expected to affect Lamprell’s bid pipeline. We anticipate intense competition with a large number of players chasing fewer projects, leading to increased pressure on margins,” Lamprell said.

Lamprell’s chief executive, Jim Moffat, added: “With the recent slump in the oil price, winning work in 2015 is going to be a challenge as the industry adjusts to the new realities.”

The company said it expects revenue and its “financial performance” this year to be 10 per cent below “current expectations”.

Lamprell is among many in the oil sector – and oil services specifically –whose shares have slumped amid the oil price crash over the past few months. Its shares are down about 45 per cent since their peak last June.

JP Morgan Cazenove, the broker which advised Lamprell on its stock exchange listing, said in a note to investors that it would trim its forecast for Lamprell’s revenue this year by 11 per cent to $941 million and earnings per share by 8 per cent to just above 17 cents.

Lamprell employs about 10,000 people and its primary facilities are in Hamriyah, Sharjah and Jebel Ali. It also has facilities in Saudi Arabia and Kuwait.

James Thompson at JP Morgan Cazenove said the fact Lamprell is focused heavily on the Middle East should help it weather the low oil price storm.

"We do see relative protection from its local markets in the Middle East, where the large [national oil companies] have the benefit of lower-cost operations," Mr Thompson wrote.

“As clearly shown by the recent order from [Abu Dhabi’s National Drilling Company], having a [national oil company] as its main client should stand Lamprell in good stead and enable continued sector relative outperformance. NDC still holds the option to order three additional rigs, which could add close to $550 million to its backlog.”

The sell-off in the oil sector has been so sharp and sudden that it has left analysts at a loss as to when the slide might reverse.

The investment bank Goldman Sachs yesterday took a stab at a forecast but sounded as bewildered as anyone: “The search for a new equilibrium in oil markets continues,” the paper starts off.

Goldman’s commodities team, led by Jeffrey Currie, said that capital in the US oil market would dry up quicker than in the past, forcing producers to cut back more quickly because they won’t be able to raise funds until oil prices recover.

“The credit, equity and oil price mix today is likely appropriate to achieve the slowdown in supply growth needed to balance the global oil market by 2016,” the Goldman analysts conclude.

Already, capital investment levels are 25 per cent lower than they were last year.

Goldman expects investment to be erratic because it can be turned off and on more quickly than before. The bottom line is that the bank expects the oil market to recover only slowly and erratically.

“We now expect US supply growth to slow to 400,000” barrels per day by the fourth quarter of this year (compared with the previous year). The US Energy Information Agency had forecast growth of 1 million bpd this year.

Goldman also expects demand to recover but later in the year, so that inventories will grow sharply in the first half of this year. “We expect that the global market imbalance will be larger in [the first half of this year] than we had previously expected, with global inventories growing by nearly 1.1 [million bpd] on average,” the bank predicts.

In that scenario, oil prices won’t improve any time soon.

amcauley@thenational.ae

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