Higher US crude output is nullifying the Opec oil cuts
A DAY after UMW Oil & Gas Corp Bhd (UMW-OG) announced it had won contracts for two of its rigs and expressed optimism that the company’s seven rigs would be fully utilised by the second half of the year, the stock was unchanged at 62 sen a share, which is near its all-time low, in trading yesterday.
The caveat to its announcement of full utilisation of its rigs was that its earnings would remain under pressure for some time. This scenario of which a company has its assets fully employed, but not for long, and warns of its earnings goes to show just how tough things are in the oil and gas (O&G) sector today.
Forget about the day when crude oil breaches US$100 a barrel again. Just about everyone thinks that will not happen in the short or even medium term. There are also grave concerns that the high prices of yesteryear may just be consigned to a footnote in the industry’s past.
Analyst reports of UMW-OG yesterday showed just how tough things are in the exploration business. Many are projecting losses, albeit on a declining scale, for the oil exploration company over the next two to three financial years, and with 59 rigs idling in the South China Sea waiting for jobs, there is a huge amount of over-capacity in the exploration side of the business that is waiting for work. Charter rates will remain depressed as long as there is a huge number of rigs out there unemployed.
Putting pressure on the industry is not just the surplus of equipment waiting in the industry. Oil-producing countries are now putting a lid on supply to shore up prices, and the latest move by the Organisation of the Petroleum Exporting Countries (Opec) to extend production limits indicates the tough situation when in comes to keeping production, and prices, in check.
What compounds matters for the traditional O&G companies is shale gas. Reports indicate that these smaller and non-traditional oil companies are busy getting to work and shale oil is on the up.
Higher production from shale suggests that these companies have managed to bring down their cost of production to a point where it is profitable for them to start exploration and production even when oil is at US$50 a barrel or less. It was reported that US crude oil output is creeping up to 9.5 million barrels a day as output from the Permian Basin is cranked up.
Higher US crude output is nullifying the Opec oil cuts and with the cost of land-based crude oil being much lower than offshore or deepwater wells, the long-term tug-of-war between the traditional producers and the new boys is going to be one of attrition.
With the dynamics of the industry now vastly different from the time of the last boom, what is going to pressure crude oil prices is the increasing use of electric cars and more fuel-efficient engines, which require no or lesser distillates to run their engines.
With the world now changing its consumption habits of crude oil, and with shale supplies now shooting up, the future of many O&G companies on Bursa Malaysia will be dicey.
As it is, UMW Holdings Bhd is distributing its ownership of UMW-OG to shareholders, and Dayang Enterprise Holdings Bhd is distributing a 37.5% stake in Perdana Petroleum Bhd to its shareholders. The distribution of these shares would most likely not have been done if oil prices were high, or if the outlook for the industry is rosy.
For the industry in Malaysia, the cost of operation has to come down, and the ability to survive with oil prices at the lower end of its recent historical range will be critical for an industry that has bought a lot of its assets at higher prices and is stepping on the brakes to keep costs down.
With consolidation of the industry still seeing inertia among controlling shareholders, one must wonder just what is the future for the vast number of service providers in Malaysia if the price of crude oil remains depressed for much longer than the near three-year slump it has been in recent times, and if banks are not as forthcoming in lending money to such companies.