More consolidation seen in O&G industry

Shahreen (right) and MPRC senior vice-president Syed Azlan Syed Ibrahim at the media briefing and engagement session with MPRC’s management team in view of the launch of MPRC report on 100 companies in the oil and gas sector.

It will be driven by current weak oil price, as companies need to grow in terms of size and capability to stay competitive

IT is hard to predict when oil prices will rise to more profitable levels again.

But with the economic reasons behind the collapse of global crude oil prices unlikely to go away anytime soon, industry players will just have to brace for a prolonged period of tough business environment.

To remain in the game, many will likely seek consolidation or other merger and acquisition (M&A) exercises.

In Malaysia, such trend is already emerging, with industry observers regarding Dayang Enterprise Holdings Bhd’s buyout offer for Perdana Petroleum Bhd last month as the start of a consolidation phase for the local oil and gas (O&G) sector.

According to Malaysia Petroleum Resources Corp (MPRC), the industry is expected to move towards further consolidation, driven by the current weak oil price environment, as companies need to grow in size and capability to stay competitive.

“The silver lining in this whole oil-price conundrum is that it gives a bit of push to the industry to look at the urgency of consolidation,” MPRC executive director Dr Shahreen Zainooreen Madros says.

At a media briefing in conjunction with the inaugural publication of MPRC 100 Oil and Gas Services and Equipment (OGSE) Companies over the week, Shahreen stresses that the agency remains supportive of the agenda to help local companies look among themselves to see how they can collaborate, so that they can attain a competitive and beneficial solution in an increasingly challenging environment.

Established in 2011, MRPC is a unit under the Prime Minister’s Department tasked with promoting Malaysia as the top O&G hub in Asia-Pacific by 2017.

Shahreen notes that having larger OGSE companies is in line with the country’s push to become a regional O&G hub.

Besides the weak oil price environment, he notes that increasing globalisation and the creation of the Asean Economic Community, or AEC, by end of this year are also setting the scenario for the local OGSE companies to consolidate to become more competitive globally.

“Our local players need to grow in size and capability so that they can expand their operations beyond the home turf and compete in the global market.

“Like it or not, this is a global industry. We are not just competing within the local sphere,” Shahreen points out.

Subdued oil prices

At present, there are about 3,500 OGSE companies in Malaysia.

Of that, only 28 are considered large, based on their having revenue of more than RM500mil, according to data compiled by MPRC.

“To be a hub, we definitely need to have a higher number of companies with such scale and size,” MPRC senior vice-president Syed Azlan Syed Ibrahim explains.

The whole idea of consolidation to create bigger OGSE companies in the country is for players to gain economies of scale and the right technology to stay competitive, he says.

Global crude oil prices started to collapse in the second half of 2014.

Based on the global benchmark Brent crude, the commodity is currently trading at around US$65 to US$66 per barrel, compared with its 2014 high of US$115 per barrel last June.

According to Shahreen, building capability and enhancing competitive edge are keys for OGSE companies to endure the weak oil price environment.

“The decline in the price of oil is pushing the need to reduce cost ... everybody everywhere is talking about ‘competitive solutions’,” he says.

Analysts expect crude oil prices to remain suppressed for a prolonged period due to oversupply of the commodity in the market, as weak global growth takes its toll on energy demand and key international players are not willing to cut production.

The US Energy Information Administration, for one, has projected per barrel of Brent crude oil price to average at US$61 this year and US$67 next year.

As it is, the last two quarters have already seen many companies registering significant drop in earnings due to weak oil prices and low activities.

Azlan shares that the MPRC is currently working with local OGSE companies to manage the challenges posed by low oil prices.

Oil prices will eventually recover, as the commodity is a depleting natural resource.

Adjust proactively

But until then, Azlan stresses, local OGSE companies will have to adjust proactively to the prevailing conditions in order to be better positioned to capitalise on an upswing in the future.

“Those that are better prepared will be able to reap the benefits once the market recovers,” MPRC senior vice-president Syed Azlan Syed Ibrahim said.

Despite the slump in crude oil prices dampening sentiment, MPRC says Malaysia is still attracting a lot of foreign interests for the country’s O&G industry. This, Shahreen says, is partly helped by the weak ringgit.

“Although oil prices have dropped globally, Asia – Asean in particular – is still a far more interesting market,” Shahreen says.

“Asean is the centre of emerging markets and the requirement for energy is still very big,” he adds.

On the right track

While Malaysia’s OGSE industry still lags in terms of company size, technology and talent compared with international oil and gas hubs such as Stavanger in Norway, Shahreen stresses that Malaysia remains on the right track to become a regional hub in the next two years.

He notes that despite the country’s shortcomings, many international players already consider Malaysia as a regional hub now.

“We’ve seen a marked change in perception over the last four years since MPRC was initiated to promote the country’s OGSE industry,” Shahreen says, adding that positive feedback from international players is important to Malaysia’s pursuit to become a regional hub.

The challenge, though, he concedes, is getting other Asean countries to buy into the idea.

“While international players recognises Malaysia as a hub, what about those in Asean? We need to take a very active role in selling the idea (of Malaysia being a regional hub) among Asean countries so that, together, we can actually do a lot more win-win collaborations,” he says.

As part of its effort to promote Malaysian O&G capabilities in international markets, MPRC invites local companies to have their profile featured in its annual Malaysian Oil & Gas Service and Equipment Catalogue. Forms can be downloaded from the agency’s website at www.mprc.gov.my and emailed to [e-mail]

SapuraKencana tops ranking

SAPURAKENCANA Petroleum Bhd has emerged as the top company in the oil and gas services and equipment (OGSE) industry in Malaysia out of around 2,800 major players sampled by the Malaysia Petroleum Resources Corp (MPRC).

The inaugural publication by the unit under the Prime Minister’s Department is based on OGSE companies’ revenue in 2013, as financial information of non-listed players for 2014 is not yet available for comparison purposes. In the current MPRC 100 list, SapuraKencana’s position was shown to have improved from the third placing in 2012 to the first in 2013.

This was followed by Malaysia Marine and Heavy Engineering Holdings Bhd, Dialog Group Bhd, Bumi Armada Bhd, KNM Group Bhd, Muhibbah Engineering (M) Bhd, Technip Geoproduction (M) Sdn Bhd, Scomi Group Bhd, Wah Seong Corp Bhd and Halliburton Energy Services (M) Sdn Bhd.

In 2013, Malaysia’s OGSE industry revenue was valued at RM82.7bil in 2013. This represented a growth of 6.6% from RM77.6bil in the preceding year.

Data compiled by MPRC shows that the top 100 OGSE companies dominated the sector, accounting for 71.6% of industry revenue in 2013.

On average, the MPRC 100 also saw strong growth in 2013, with revenue rising at a three-year compounded annual rate of 21.5%, and three-year pre-tax profit margin averaging at 5.2%.

It will be interesting to see how the industry performed last year, considering the collapse in oil prices in the second half of 2014. Market talk has it that the numbers are not going to look good.

MPRC says it expects to release the rankings for 2014 by the end of this year.