Wintermar Offshore back to black in 1Q2020

Wintermar Offshore Marine (WINS:JK) returned to profitability during 1Q2020 with Owned Vessel Revenue up 18% YoY to US$9.9 million, and gross profit of US$1.28 million compared to a gross loss of US$0.73 million during 1Q2019. The quarter saw a pick up in utilization of high tier vessels as several new contracts commenced, lifting the average utilization of the fleet to 68% compared to only 46% a year ago. The Company turned positive in gross and net profit for the first time in three years.

-Owned Vessel Division-

Continuing the uptrend in offshore activity for 1Q2020 which began in 2019, the Company earned a positive gross margin of 7% in the Owned Vessel Division compared to losses in the past 4 quarters. High tier vessels were again in demand, in particular the Platform Supply Vessel type, which improved to 90% utilization in the month of March 2020. There were several oil and gas projects in Indonesia which required a combination of mid and high tier vessel for drilling, engineering and support jobs. For 1Q2020, Owned Vessel direct costs declined by 8% YOY mainly due to a 17% decline in depreciation from vessel sales and impairment of fleet. Fuel costs also fell significantly by 30% due to higher utilization and the end of the “wet contract” which was in operation a year ago, whereby fuel cost was borne by the Company. With the better utilization, Crewing costs also rose by 18% to US$2.5 million, also due to some foreign contracts which require foreign crew.

-Chartering and Other Services-

Chartering Revenue for 1Q2020 was 22% lower than a year ago at US$2.3 million. However, chartering margins improved from 11% to 15% and gross profit from Chartering improved by 2% to US$0.33 mil compared to the previous year. Income from Other Services fell by 52% to US$0.29 mil.

The Management’s continued drive for efficiency has produced results, as indirect expenses fell by 12% YOY to US$1.5 million for 1Q2020. These were due to savings in staff costs, marketing and office utility, while depreciation fell after some equipment was fully depreciated. The lower overhead costs are the result of the shedding of older and smaller vessels in the continued vessel sale program undertaken in the past two years, which has facilitated the streamlining of onshore staff. The Company’s fleet has now been reduced to 47 vessels from 58 vessels two years ago at the end of 2018.

-Other Income, Expenses and Net Attributable profit-

Interest Expenses fell 16% YOY to US$0.94 million for 1Q2020. Debt has been reduced significantly to achieve a net gearing ratio of 36% at the end of the first quarter. Share of losses at associated companies amounted to US$0.27 million but this was offset by a US$0.97 million profit on sale of vessel and foreign exchange gain of US$0.7 million.

The Company turned a profit of US$48,327 during 1Q2020, compared to a loss of US$2.3 million in 1Q2019. EBITDA improved by 27% YOY to US$5.1 million for 1Q2020.

-Oil and Gas Industry-

The Coronavirus pandemic has caused major disruptions to the world. The necessary lock down measures taken by many countries all over the world to protect human life also caused the worst contraction in economic activity in recent history. Air and road traffic was brought to a standstill in 2Q2020 as a result of the strict travel restrictions being imposed all over the world. As oil demand collapsed, storage capacity in the USA started to fill up. With nowhere to store crude, the WTI Crude oil price fell to a historical negative US$37 per barrel. US oil producers had no choice but to shut down producing wells, and OPEC responded with an agreement to reduce production by 9 million barrels a day by 2020. The supply cuts were swift because of the lack of storage capacity.

It is estimated that oil demand hit bottom in April 2020 at low of 72 million barrels per day (bpd). Since early May, there has been some recovery in oil demand as some countries which have COVID-19 under control are starting to ease travel restrictions. Rystad Energy Research estimates that oil demand will gradually recover over the rest of the year, and total oil consumption for 2020 will likely be about 89 million bpd, a decline of 11% from 2019.

However, because of the sharp decline in capex that has already occurred in the past few years, researchers are now projecting an oil supply shortfall of 5 million bpd by 2023. There is therefore more optimism that offshore production will have to meet this shortfall.

Oil prices are projected to stay around US$30-40 per barrel in 2020 and 2021, as inventories will be drawn down before supply and demand find a balance.

-Outlook for Offshore Support Vessels (OSV)-

Many oil companies have announced cuts to their capital expenditure projections for 2020, which is estimated to be 20-24% lower in 2020 compared to 2019. The majority of the announced cuts are in the US Shale segment which has higher average costs and a shorter investment cycle.

For owners of Offshore support Vessels (OSV), 2020 was supposed to be a recovery year as utilization and rates both started to rise. However, COVID-19 has put a halt on that. The recovery is now likely to be delayed by a year. In Indonesia, we expect Pertamina Hulu Energi, as Indonesia’s national oil company, to continue to ensure that production delivers the required supply to the country. However, for some independent international oil companies, the current weak oil price has already caused a slashing of capex and some suspensions in operations.

In the short term, there will be lower utilization and some downward pressure on charter rates. The OSV industry has already reduced costs significantly and charter rates have not really recovered from the lowest point last year. Therefore, we do not expect a sharp decline in charter rates as a result of the COVID-19 impact because many companies are already operating at low or even negative margins. It is also expected that offshore oil production will benefit from lower shale output as demand recovers over the next two years, which will underpin OSV demand in the coming year.

-COVID-19 Response and Impact-

Wintermar is committed to prioritizing the health and safety of all staff and clients. As the COVID-19 pandemic started to impact the world, management activated the Business Continuity Plan in mid-March. This was to ensure that business operations were undisrupted while at the same time taking measures to ensure the health and well-being of all personnel and clients. Starting with socialization across our fleet and office on sanitization and hygiene practices, new procedures were implemented, including daily temperature taking, frequent cleaning and disinfecting of premises, provision of hand sanitisers, masks, and PPE, as well as social distancing. For office staff, we implemented Team A & B segregation with half the office “Working From Home” (“WFH”) on alternate days. By the 23rd March 2020, the company moved to full scale WFH before the Indonesian government implemented wide scale social distancing (“PSBB”). The Company’s fleet continued to operate normally during WFH through remote management of the fleet and using online video meeting applications for daily meetings.

Due to the strict travel restrictions put into place globally, there was an impact on the crew change schedule and delivery of spare parts. There were widespread flight cancellations, port closures, quarantine requirements and some charterer regulations prohibiting new crew from going on board during COVID-19. As a result, some of the crew who were scheduled to be relieved had no choice but to stay on board for longer. Crew which were allowed to go on board had to serve a 14 day quarantine prior to boarding the vessels. So far, because most of our vessels work in remote areas and not many are carrying passengers, the crew are able to mitigate the risk of COVID through various procedures of social distancing and frequent disinfection. Sourcing of some spare parts required for maintenance and docking were also affected due to disruptions in logistical services which caused some operational delays.

A COVID-19 task force has been tasked with coordinating all procedures and responses for the Company. The team meets regularly to monitor and adapt to the changing situation. Procedures for temperature taking, frequent disinfecting and distancing were put in place on board the fleet. There will be continued monitoring of procedures and more work to ensure that our shore teams and crew are well cared for during this time while ensuring no disruptions to clients’ operations.

In terms of business operations, Wintermar is affected by an international oil company who has terminated their exploration and development work in Indonesia, citing COVID19 as the reason. In another case, a contract in Africa which was supposed to commence in April has been suspended until further notice. The Indonesian government has provided tax reliefs for personal income taxes which will benefit staff and crew as the Company operates on a gross salary basis.

-Strategy and Outlook-

Wintermar had already experienced a turnaround in 1Q2020 and expectations were for a continued improvement in profitability for 2020. Unfortunately, the COVID-19 pandemic has caused a sharp contraction in oil demand resulting in cuts in capital expenditure by the oil producers.

Management expects that utilization rates will decline in 2Q and perhaps stay low for the rest of 2020 as short term contracts which expire in this period are unlikely to be renewed.

Learning from recent experience in the 2015 downturn, the Company has been quick to implement cost cutting measures in the past month. Some of these include reduction of crew on idle vessels, usage of shore power connection, cutting back on subscriptions for communications services for non operational vessels as well as postponement of non essential expense and a hiring freeze.

There will be more effort to improve efficiency through streamlining processes to reduce paperwork and increase automation.

There have been some postponement of drilling projects from 2020 to 2021 as oil companies have been unwilling to commit while the outlook on oil prices remains unpredictable. However, the worst month for oil consumption and demand seems to be behind us in April. As countries start to loosen travel restrictions, there are signs that consumer preferences have shifted towards private vehicles instead of mass transport, which has a bigger impact on road fuel demand. It is likely that by the third quarter, there will be a better understanding of how economies will resume activities post COVID-19 and demand for oil is predicted to recover to 2019 levels by end of 2021.

Wintermar’s major lenders have been very supportive during this time. The Company is in the final stages of rescheduling loan repayments with major lenders which will provide better matching of cash outflows with the current scenario.

Contracts on hand as at end March 2020 amount to US$78.5 million.
Source: Wintermar Offshore Marine Group

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