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Chairman's Statement

 

Chairman's Message

Dear Shareholders,

On behalf of the Board of Directors ("Board") of Kim Heng Offshore & Marine Holdings Limited ("Kim Heng") and its subsidiaries collectively the "Group"), I present to you our annual report for the financial year ended 31st December 2017 ("2017").

In 2017, the global oil industry continued to suffer from the impact of the oil price downturn which started in 2014, despite oil prices rising to above US$60 per barrel during the year. Increasing shale oil exports from the USA and oversupply of crude oil by Iran and Saudi Arabia to increase market share continues to depress oil prices and affect overall industry services demand. This has led to the cancellation of projects by many oil companies, and a reduction in spending on uneconomical exploration and development projects. In turn, this resulted in drilling rigs, offshore vessels, shipyards and service companies being idled. Poor operating conditions persisted and worsened as companies struggled to refinance debt and obtain fresh borrowings from the banks.

Despite cost cutting measures and prudent spending in 2017, the extended weakness of our industry caused revenue from the Group's Offshore Rig Services and Supply Chain Management ("ORS-SCM") segment to decline year on year (Y-O-Y) by 11.1% to $27.4 million. No revenue was generated from the Group's Vessel Sales and New Build ("VS-NB") segment due to lack of new projects undertaken during the year.

In 2017, the Group reported a net loss of S$15.3 million compared to FY2016's net loss of S$17.8 million. This included the S$3.6 million one off non-cash impairment loss due to the write-down of some assets. Excluding the assets impairment loss, the Group would have reported a net loss of S$11.7 million and a negative EBITDA of S$2.7 million.

Industry Outlook Ahead

As we look ahead in 2018, the rising oil price, which has stabilised at around US$60 per barrel is an encouraging sign to the industry. We expect oil exploration and development spending by oil majors to slowly improve over the coming months, driving demand back to a more meaningful level for the offshore drilling rigs. This will support rig reactivation, although the environment is still extremely challenging and the jobs available are mostly on short term basis. However, the market is showing signs of improvement in 2018 with increased tendering activities, and as a result we are looking at different areas of the supply chain to generate additional revenue.

In January 2014, after raising S$40 million from our IPO, we adopted a prudent approach to preserve our cash reserves when many of our peers were investing aggressively into assets at overly inflated prices. We avoided a herd mentality and did not follow the crowd with overpriced asset purchases ahead of the downturn. We maintained patience and refrained from chasing high asset prices with our capital, and instead built resilience across our business by searching for strategic niche businesses sheltered from the worst of the downturn.

In July 2015, the oil industry was faced with uncertainty not seen in many years, marked by a continuous decline in oil prices that threaten the viability of many offshore oil projects.

The sharp drop in the oil prices, resulting in many projects cancellations, had led to many companies being caught in the storm and unable to fulfil their financial obligations throughout 2016 and 2017.

Many companies who used debt to fuel rapid growth during the oil boom are now facing grave financial pressure. These companies are faced with overleveraging of their offshore assets. Many of these companies will not be able to maintain solvency while waiting for an industry recovery given that the current industry's vessel charter rates are very depressed that they cannot cover for operating costs and asset valuations have dropped as much as 90% from past purchase prices due to excess capacity.

The financial troubles for many weaker industry players and the resulting insolvencies can help reset the market, consolidating the number of industry competitors and weeding out highly speculative operators who have contributed to overcapacity.

We have avoided the worst of the crisis, having learned through many previous crises to guard against overleveraging, and to remain prudent with sufficient cash on hand to sustain through the downturn.

Future Growth Strategy

Despite continued industry uncertainty, Kim Heng remains focused on navigating ourselves through the downturn. We also continue develop capabilities for long term growth.

Leveraging our 50 years of experience managing industry cycles through booms and busts, we continue to focus on commercially viable business that can sustain during the downturn and thrive in an upturn. By prudently investing when the industry is weak and asset prices are distressed, we aim to establish a strong position.

Firstly, in July 2017 we were able to secure three (3) anchor handling tugs of 10,800 horsepower and another 6,000 horsepower in February 2018 at distressed prices. These vessels will give us good potential to earn high returns in the future. These purchases will help strengthen our market position and operating capabilities ahead of an eventual upturn in the oil industry. With our operating capabilities with these offshore vessels, Kim Heng was able to quickly charter these 3 vessels out on spot charters to perform rig towage for some oil majors in the region.

While in the past we only chartered-in the vessels, we now see an opportunity to be an owner and operator of offshore vessels where our entry price is very low. We are looking to expand our fleet prudently as more distressed opportunities emerge, as this will give us economies of scale to offer comprehensive solutions with our fleet and enjoy long-term cost advantages versus many of our peers.

Secondly, the Group's two (2) waterfront shipyards in Singapore remain valuable assets that will enable us to swiftly capture a wide range of vessel and rig activation and maintenance service opportunities during an upturn.

Thirdly, we are diversifying into the defence business and other marine activities to build resilience across our business, sheltered from the cyclicality of the energy industry.

We will be constantly looking for new growth, setting new goals and strategies. We will capitalised on our knowledge and skills, to move fast to seize new opportunities before conditions change.

Words of Appreciation & Proposed Dividends

On behalf of the Board, I would like to express my sincere thanks to our hardworking team of management, staff, and employees.

I would also like to thank our partners, suppliers, customers and business associates for their faith in us and constant support through the years. I hope to continue to build stronger relationships with all of you during these challenging times.

Also, I wish to thank our key institutional investor, Credence Partners, for their vote of confidence and continuous support through the years.

In order to reward our shareholders for their loyalty & support, the Board has recommended a final dividend of 0.07 Singapore cents per share, subject to shareholders' approval at the forthcoming annual general meeting.

We welcome your thoughts and support as we move forward into the year of Jubilee and are hopeful for a better year ahead for Kim Heng in 2018!

Yours Sincerely,
Thomas Tan Keng Siong
Executive Chairman and Chief Executive Officer