NewOcean to scale back oil business as COVID-19, low oil prices dent prospects

Singapore — Hong Kong-listed NewOcean Energy Holdings Limited said Aug. 31 that the coronavirus pandemic and the slump in global oil prices had adversely affected its business segments including its oil bunkering activities in Singapore and Hong Kong, forcing the company to scale down its operations.

The company's segments include oil/chemical products business, sales and distribution of LPG, sales of electronic products as well as sales and distribution of natural gas.

In the first half of 2020, the company's oil/chemical products business segment achieved a total sales volume of around 2.64 million mt in Hong Kong, the Mainland China and Singapore, representing a year on year decrease of about 3.47% compared to the same period last year, it said in a stock exchange announcement.

Due to the difficult market conditions, the segment's gross margin narrowed to 1.11% in H1 2020 compared to 4.28% in H1 2019, it said.

"Since our major competitors had turned to cut-throat tactics to sell products in large lots at low prices for cashing in during March and April, the Group unwillingly had to use the same tactic for our oil products business, that was to sell products below costs for the depletion of its holding stock so as to avoid further impairment risks as a result of the ongoing oil price slump," it said.

Tough bunker markets

Demand destruction arising from the coronavirus, or COVID-19, pandemic had weighed heavily on the Hong Kong bunker fuel market in 2020.

"Bunker suppliers haven't been making money, on the contrary [we] are trying to operate without losing too much money," one supplier said on Sept. 1.

Reflecting this, Hong Kong delivered marine fuel 0.5%S differential to benchmark Singapore 10 ppm gasoil cargo assessments was minus $14.60/mt over March-June, collapsing from an average of $54.92/mt over January-February, S&P Global Platts data showed.

"Suppliers are selling at a loss and if we don't, there won't be buyers at all, and we have fixed costs to consider," a second supplier said on Sept. 1.

LPG sales volumes rise

Meanwhile, the company's LPG business still retained a gross margin of over 10% in H1 2020 as it did in H1 2019.

LPG sales volume in H1 2020 stood at about 1 million mt, a 3.17% year on year rise compared to the same period last year.

The growth came from wholesalers, tempering the impact of a drop in sales volumes by industrial clients due to COVID-19 as well as a fall in LPG demand for civilian usage reflecting the growing energy transition, it said.

Tightening credit

The company said that due to a net loss, it could also not fulfill certain bank covenants relating to the non-current portion of these bank loans.

This condition was also accentuated by the tightening credit environment after the collapse of Hin Leong Trading, a major oil trader in Singapore.

"The Hin Leong incident has had an immediate ripple-effect on the oil industry, as banks in both Singapore and Hong Kong apparently became very concerned that there could be further defaults by oil traders as oil prices drop and accordingly began to tighten their credit lines to other oil traders in the market, including the Group," it said.

As a result of that and despite that the company has no business or other connection with Hin Leong whatsoever, a number of the company's lenders demanded a reduction or limitation of the documentary and other short term credit, it added.

Looking forward

The directors of the company have taken several measures to mitigate its liquidity pressure and to improve its financial position, it said.

The company will also take measures to downsize the oil products business to reduce operating cost and to generate additional cash through the disposal of non-core assets, it added.

In the oil products business, the costs of refueling business in Hong Kong are relatively high, it said. So, the company is committed to selling wholesale to clients who are distributors, and to lease its existing oil tankers to wholesalers, it added.

"As to our business in Singapore, certain level of its operations will remain as marine bunkering business, with oil products of relatively stable gross profits and high commodity flow being the key," it said.

For its LPG business, the company is currently exploring further opportunities to develop more end-user markets for its bottled LPG, it said.

"We have begun wholesaling LPG to Africa two years ago. At present, we are in the search of suitable land parcels in Africa for the construction of LPG terminal gas plants and bottling plants," it said.

The company will also take steps to grow its new energy business including hydrogen refueling plants in the future, it added.