It’s survival of the fittest, says Shamsul

  • Business
  • Saturday, 29 Nov 2014

TAKING the cue from US oil and gas (O&G) services giant Halliburton Co’s takeover bid of its rival Baker Hughes Inc, a consolidation in the local scene is probably the way forward, if Petronas’ head honcho is to be taken seriously.

The reason the biggest deal in the global O&G sector since 2010 is taking shape is due to plunging crude prices that has pushed both Halliburton and Baker Hughes to come together to ensure margins are protected.

Petronas president and chief executive Tan Sri Shamsul Azhar Abbas foresees the industry going through a consolidation.

“The contractors and service providers will have to realign themselves to cope with lower oil prices. It will be a battle of the fittest and there will be winners and losers,” Shamsul said at a press conference to announce its third quarter results.

“Only the most resilient will remain in the game.”

Malaysia is best known for its thriving oil and gas industry that is supported by Petronas that spends an average RM60bil per year on capital expenditure. But the spending will be cut by up to 20% from next year onwards until the international price of Brent crude has settled down at more than US$80.

A shrinking pie implies that weaker players might be weeded out.

A few O&G analysts StarBizWeek spoke to say lower valuations present attractive entry for some investments especially if there are synergistic propositions.

The biggest hurdle, however, is the issue of ownership and corporate structure.

An analyst says that it makes sense for companies to acquire other O&G companies that have synergies, like the case of Dayang Enterprise Holdings Bhd (DEHB) and Perdana Petroleum Bhd.

“There is room for consolidation among domestic O&G service providers to merge into bigger and more efficient entities.

“Like the case of Halliburton and Baker Hughes, we can see synergies among local oilfield service providers like Uzma Bhd, Deleum Bhd and Scomi Energy Services Bhd,” he says.

As for assets-rich companies such as the offshore support vessel operators, the question boils down to valuation, as the acquirer have an option of just buying the assets.

Although where the direction of oil prices are heading remains a question, some analysts see opportunities for firms with the financial muscles to scout for long-term investments.

“After all, crude oil is a commodity and it’s normal for prices to fluctuate. As long as they have the holding power, it may be a good time to buy,” another analyst says.

One imminent case is DEHB’s move to further increase its stake in Perdana.

Market observers do not rule out the possibility for the former to take over the latter but a source says DEHB is not in a hurry and will ensure that it is able to consider such a move only if the price tag is very attractive.

“DEHB’s last highest transacted price of Perdana shares was RM1.78. If it were to launch a general offer (GO), it will have to be higher,” he explains.

At that price, Perdana will be valued at some RM1.3bil, which is about RM700mil surplus of Perdana’s assets, he adds.

The surplus will then be booked as goodwill and if the synergistic values between the two companies do not realise, DEHB will have to bear the risk of writing an impairment loss in the future under this scenario.

“DEHB has the funding to increase its stake but it will also be cautious,” he says.

Hence, DEHB may choose the option of keeping its holdings under just below 33% so that a GO is not triggered.

The hook-up, construction and commissioning specialist has raised its stake in the latter from 24.56% at end-March to 28.62% early this month.

Perdana’s share price has fallen from a peak of RM1.94 in March to RM1.52 in October.

At current level, Perdana is trading at a price-to-earnings (P/E) of 10 times, which is below the 12 to 13 times forward P/E that analysts ascribe to O&G counters after a revision.

Another recent example of an investment stake in an O&G firm is Felda Investment Corp Sdn Bhd’s emergence as Barakah Offshore Petroleum Bhd’s substantial holder with a 9.73% stake.

Barakah is trading at 11 times P/E even though its latest set of financial numbers came in strongly with revenue that soared 193% to RM256mil and net profit that surged 166.1% to RM28.4mil.

However, hydrocarbon assets are not hit by oil prices yet.

An industry observer comments that prices of oil assets have not come down despite the lower crude oil prices.

“The asset owners have put so much money in those assets that they won’t sell them cheap just because oil prices were depressed for a few months.”

According to him, it takes a long duration of battered crude oil prices to have an impact on O&G assets.

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