Malaysian oil and gas companies feel the pinch

Apart from the value of the ringgit to the US dollar, the other closely watched number if the price of crude oil.

For Malaysia, a net exporter of oil and gas, the price of crude oil has a major implication on the Malaysian economy.

The Government’s Budget is premised on the average price of Brent crude oil at US$55 a barrel and right now, the average for the year is close to that. With Brent trading below that number, it is very likely that the average for the year is going to come in lower than what the Government had forecast months ago when it revised its budget for 2015.

But the implication does not stop at the Government’s fiscal position. The collapse of the price of crude oil has had a major effect on companies, employment and the economy.

For Petroliam Nasional Bhd, the slump in the price of crude oil puts a strain on its finances. From the need to financing its activities and pay the Government the kind of dividend it is expecting to help run the country, the weak price of crude oil is wrecking havoc throughout the supply chain.

Service providers listed on Bursa Malaysia have already showed the pain what the drop in global crude oil prices have had on their business.

Lower crude oil prices will mean lesser demand for the services it is providing. A number of companies have had to makes write-offs on their on-going businesses and the weak price of crude oil will mean that exploration and production activity will slow down.

As it stands, the number of rigs looking to drill for crude oil in new areas have fallen dramatically, and that means poorer prospects for companies that own drilling rigs.

The entire supply and value chain of companies that partake in the exploration for oil is going to feel the pinch. Those that are servicing existing production capacity will be under pressure from the majors that rely on such services. It is a buyers market out there and cost, and eventually revenue, will have to come down for such companies.

But those in the downstream segment, things are not so bad. The refiners listed on the stock exchange are making very good money now and the petrochemical companies that use oil and gas products to make the various derivatives and chemicals that are used in consumer goods such as plastics are still doing OK.