IT appears that the boom times enjoyed by a number of oil and gas (O&G) support service providers may be slowing down a bit.
A warning by their biggest customer, Petroliam Nasional Bhd (Petronas), has served notice that bidding will be more competitive going forward.
On Tuesday, Petronas president and chief executive officer Tan Sri Shamsul Azhar Abbas warned of falling charter rates.
He expressed caution on companies expanding their fleet O&G assets such as offshore support vessels (OSVs) and drilling rigs, stating that indications were that the charter rates going forward would come down.
Citing a recent tender exercise, Shamsul said the OSV charter rates in the exercise were 15% below current market rates.
An O&G company head told StarBizWeek that Malaysia’s OSV rates were considered quite high for smaller vessels, and this was probably due to the industry being protected. “If the market was not protected, for example like in Norway, then you would see more competitive bidding, as foreigners would be flooding the market. Right now, you have to be a locally registered vessel to get a job. This contributes to the premium pricing,” he says.
He adds that some of the production sharing contract (PSC) players have been complaining that their Malaysian development cost is higher because of these premium rates.
A fund manager who declined to be named says that Shamsul’s warning is perhaps directed to the operators of smaller vessels. These operators tend to be more “enthusiastic” in their bidding.
“The bigger vessels are alright. International charter rates in the Americas, Gulf of Mexico and Africa, for example, are a lot higher than in Malaysia. Bumi Armada Bhd is doing work in that region and its international charter rates are much higher compared to here,” he says.
For instance, charter rates for anchor handling tug supply (AHTS) vessels in Malaysia are US$2 (RM6.40) per brake horsepower (bhp), while in Africa, it is between US$2 and US$2.5 (RM8), and more than US$3 (RM9.60) in Brazil.
“Back home, the issue of higher rates among the smaller operators is also due to us having more sub-contractors, and hence, third-party costs. What Shamsul is perhaps trying to hint at is that Petronas needs to cut cost and get rid of the rent-seekers,” says the fund manager.
Industry at risk?
Analysts say there is no cause for panic, as most contracts of local listed companies are already locked down and most of their chartered vessels are not at risk.
“Over the near-term, the contracts of most OSV operators are not up for renewal. The bulk of these contracts are fairly new, having been awarded in the middle to the end of last year. These contracts also typically have a five-year lifespan,” says MIDF O&G analyst Aaron Tan.
Another analyst says as most of these contracts are awarded by reputable oil companies like Petronas, Shell and Petrofac, the risk of rates being readjusted downwards has been further minimised.
Tan adds that most of the OSV-listed companies, such as SapuraKencana Petroleum Bhd and Bumi Armada, own mid-to-high-end OSVs, which have less supply in the market. These players will be able to maintain their margins.
It is the players who own the lower-end vessels, such as smaller AHTS vessels and tug boats, which will see their future margins being affected.
“There are many such small vessels in the market. This is especially apparent for those tugboats which cost around US$15mil to US$20mil (RM48mil to RM64mil) to construct. However, for high-end vessels like Bumi Armada’s floating production, storage and offloading vessels which cost hundreds of millions of ringgit, there is no issue of oversupply,” explains Tan.
He adds that another example of an offshore vehicle which will continue to command high rates are the owners of pipe-lay and derrick lay barges – used to lay pipes which is also expensive to construct.
In Malaysia, there are three notable operators namely Global Offshore (Malaysia) Sdn Bhd, a subsidiary of Puncak Oil and Gas Sdn Bhd, Barakah Offshore Petroleum Bhd and SapuraKencana Petroleum.
Players with smaller OSV vessels are Alam Maritim Resources Bhd , Coastal Contracts Bhd and SILK Holdings Bhd.
AmResearch analyst Alex Goh also points out that the oversupply of vessels are in the 5,000 bhp segment and not the 10,000 bhp segment. Goh says that channel checks reveal that these rates are currently stabilising, while the listed players have not been aggressively buying AHTS vessels in the 5,000 bhp category.
“Even though new orders for the first quarter of 2014 are likely to temporarily slow down quarter-on-quarter due to the complexities and implementation timelines of field developments, fresh roll-outs of Malaysia’s multiple enhanced oil recovery projects will continue to underpin the overall upward momentum trend,” says Goh.
He is maintaining his “overweight” call on the sector, with “buy” calls for SapuraKencana Petroleum and Bumi Armada.
HwangDBS believes that Malaysia’s O&G sector is experiencing a sustainable growth phase, thanks to Petronas’ capital expenditure (capex) commitment. It notes that most local service providers are enjoying record-high order books.
“For instance, Petronas’ nine-month-to-2013 capex of RM38.4bil is on track to surpass its record-high capex of RM45.6bil in financial year 2012, underlining the robust O&G development in Malaysia.
This shows Petronas’ commitment to address Malaysia’s energy needs, with the lion’s share of the budget going to the upstream sector.