OSV companies worst hit in Petronas cutback on expenditure

PETALING JAYA: With national oil company Petroliam Nasional Bhd (Petronas) planning to slash RM50bil from its operating and capital expenditure (opex and capex) over the next four years in the wake of sliding oil prices, companies most affected are those providing offshore support services.

The offshore support vessel (OSV) segment is considered the most vulnerable segment within the value chain of the Malaysian oil and gas (O&G) services sector as it is relatively higher leveraged and has lower cash-coverage ratio compared to other segments such as the offshore facility construction and maintenance as well as hook-up and commissioning segments.

Industry studies estimate that the six local “asset-heavy” companies which have close to RM6bil in fixed assets have an average debt to equity ratio of over one time but a coverage ratio – which is a measure of a company’s ability to meet its financial obligations – of about 0.84 times.

Alam Maritim Resources Bhd group managing director and chief executive officer Azmi Ahmad said that to counter the slowdown in demand, the supplier of OSVs used for oil exploration and production activities, has implemented cost optimisation initiatives.

He noted that Petronas, which contributed up to 60% to Alam’s business last year, had been initiating cost-cutting initiatives since last year.

“This has been affecting not only Alam but all O&G players,” he said.

Azmi said Alam’s services were very much focused on production activities. “There are still activities utilising our services albeit at a lower utilisation rate.”

“We need to have a strong cash position in order to sustain ourselves in the downturn and are hoping to be able to spring back into action when the industry recovers,” he added.

Alam has RM114mil in cash and bank balances as at Sept 30, less than half of the RM245mil it had a year ago. Total borrowings as at Sept 30 was about RM191mil.

The company’s net profit for the nine months to Sept 30 stood at RM37.8mil, 32% lower than the net profit of RM55.3mil in the same period a year earlier.

Daya Materials Bhd which is involved in tank equipment and logistics facilities says the impact of weak crude prices is marginal.

Group chief executive officer Datuk Lim Thean Shiang said Petronas’ proposed cuts would obviously have a broad impact on the entire O&G sector.

“However, in terms of direct contribution, as Petronas accounts for only about 10% of our group business, the direct impact on us will not be significant. Our goal is to work closely with all our customers (including Petronas) to ensure that we all weather through this industry downturn and emerge stronger,” Lim said.

“Subsequently if Petronas cuts deeper, it may have a more direct impact on some of our customers in the longer term and, in turn, us,” he added.

As for UMW Oil & Gas Corp Bhd (UMW O&G) which is involved in drilling and oilfield services, the company is already putting the brakes on further investments.

President Rohaizad Darus said the company had already built in measures to address the impact of lower oil prices.

“We are already postponing further capex investment, reducing operational expenses and freezing recruitment besides not renewing employment contracts,” he said.

Still, he pointed out that as a regional player and Petronas being not its only customer, the impact of Petronas’ decision was not expected to affect it too greatly.

Tanjung Offshore Bhd’s group chief executive Rahmandin Md Shamsudin said that in the current scenario, sustainability was key. “We have adopted a strategy to optimise cost. We may also need to spread our revenue base, perhaps through a diversification. However, we have not taken any action towards this yet.”

The O&G service provider involved in engineering packages, product services and maintenance has been working to strengthen its business after a boardroom tussle early last year.

StarBiz reported yesterday that Petronas was looking at a new business model to improve efficiency and reduce its costs in response to external environment, where crude oil has fallen to below US$30 per barrel.

Petronas had started its cost-cutting measures since the last quarter of 2014 when it became apparent that the price of oil would be on a long-term decline.

Last year it cut 30% off its capex and 20% off its opex.

Meanwhile, Hong Leong Investment Bank (HLIB) said Petronas’ move was “bad news” for upstream and asset players.

“We believe asset owners in the rig (UMW O&G and Perisai Petroleum Teknologi Bhd ) and the OSV segment (Alam, Icon Offshore Bhd , Dayang Enterprise Holdings Bhd and Coastal Contracts Bhd ) would be hard hit.

Oil & Gas , petronas