Oil crash tests resilience

O&G bosses: (from left) Syed Azlan, Rohaizad, Shahreen and Kamarul at the launch of MPRC100.

Not all players are equally equipped to weather industry downturn

THESE are distressing times for companies in the oil and gas industry.

Having invested aggressively in growing their assets during the oil-boom years of 2010-2014, many may now find themselves in a quandary, as the commodity’s market has busted and its prices have crashed to levels last seen in 2003.

“While it is a good thing that companies have been investing heavily, as evidenced by the increase in the industry’s total fixed assets, it also means that many oil & gas services and equipment (OGSE) companies have taken on a lot of debt...under the current business climate, that could be a huge challenge,” Malaysia Petroleum Resources Corp’s (MPRC) senior vice-president Syed Azlan Syed Ibrahim says.

According to the MPRC, the total fixed assets in the OGSE sector had grown 24.4% to RM68.4bil in 2014 from RM55bil in the preceding year, with investments driven mainly by the top 100 players that the government agency has listed as the biggest companies in the industry by revenue.

These companies, collectively known as the MPRC100, accounted for 94.3% of the industry’s total fixed assets in 2014, as compared with 85.5% in the preceding year.

But while large OGSE companies have been investing aggressively, the MPRC notes, small-to-medium-sized players have seen their assets shrunk in both absolute value and industry percentage.

There are merits to have invested aggressively, Syed Azlan says.

“We find that most companies that have invested heavily have also been the ones that have been growing even more strongly in terms of both revenue and earnings,” he explains.

Nevertheless, the OGSE industry from now is expected to see a longer payback period for their investments due in part to the decline in global crude oil prices.

MPRC’s analysis, for instance, finds that the return on fixed assets (ROA) for the OGSE sector has declined to 9.4% in 2014 from 11.2% in 2013. Industry observers note the ROA will likely show further moderation in the next few years.

Many OGSE companies have seen a drastic cut in the demand for their assets and service since oil prices started crashing in September 2014.

And as they try to make sense of the prevailing market trends, prices of the commodity have already collapsed below US$30 a barrel, which is a far cry from US$115 a barrel in June 2014.

Certainly, not all OGSE players are equally equipped to weather the industry downturn.

“Companies with lower leverage and higher cashflow coverage to meet their financial obligations will be in a better position to capitalise on an upswing in the future,” he says.

It appears that companies in the offshore support vessel (OSV) business could be the most vulnerable within the value chain of the country’s oil and gas services sector.

This is due to their relatively higher debt, but lower cash coverage ratios.

At 1.11 times, the OSV segment’s debt-to-equity ratio is the highest within the industry, while its short-term cash-coverage ratio at 0.84 times is one of lowest compared with other segments, based on MPRC’s analysis of 34 of the MPRC100 companies identified as “asset heavy”.

Collectively, these 34 “asset-heavy” players account for 88% of the industry’s total fixed assets. Safe for Barakah Offshore Petroleum Bhd, all the listed companies in the MPRC100 list are considered asset heavy based on their total-fixed-assets-to-revenue ratios.)

According to MPRC’s data, the segments that appear to be more resilient are the facilities; maintenance/hook-up & commissioning; and offshore construction due to their combination of relatively low debt levels and healthy cash coverage ratios. Despite the industry downturn, the initiative to promote Malaysia as the top oil and gas hub in Asia-Pacific, as mandated upon the MPRC by the Government, remains on track.

“Pushing Malaysia to become a regional oil and gas hub has to continue,” MPRC executive director Dr Shahreen Zainooreen Madros stresses.

“Also, we need to continue to help local OGSE players grow in size and technological capability so that they can compete on level ground with international companies,” he says.

According to Shahreen, consolidation activities in the local OGSE sector will likely accelerate as companies adjust to the low oil price environment.

“Consolidation is an opportunity to strengthen local players in the face of an increasingly challenging and globalised environment,” he explains.

Meanwhile, at least two local industry players say the move towards consolidation may not necessarily imply the emergence of new wave of mergers and acquisitions (M&A) in the OGSE sector.

“There is not much room for most companies to explore M&A, although there are distressed companies and assets in the market already,” UMW Oil & Gas Corp Bhd (UMWOG) president Rohaizad Darus tells StarBizWeek.

“This is because we are all currently busy operating in a survival mode as we navigate the new reality,” he says.

As for UMWOG, Rohaizad says, while the group is not looking at any M&A, it will explore opportunities to work together with other companies, including its direct competitors.

“Consolidation will be great, but tough...what we are looking at is working together in consortiums or groups to offer integrated services,” he says.

Uzma Bhd managing director Datuk Kamarul Redzuan Muhamed concurs, saying, “the current environment has made us more open and ready to work with our competitors”.

Kamarul reveals that Uzma is also not exploring any M&A, as the group, which has completed seven acquisitions and joint-venture arrangements in the last two years, is focused on consolidating its internal operations and improving efficiencies.

With tumbling oil prices, Malaysia’s OGSE sector has seen its total revenue decline 10.5% to RM74bil in 2014 from RM82.7bil in the preceding year. However, the industry’s pre-tax profit grew 5.3% to RM6.5bil 2014 and its average margin improved to 8.7% from 7.4% previously. The MPRC attributes this to improved operating efficiencies.

But the downside risk continues to increase for many local OGSE players, especially with Petroliam Nasional Bhd (Petronas) planning to cut RM50bil from its operating and capital expenditure (opex and capex) over the next four years.

According to Shahreen, Petronas’ new capex plan will likely involve reallocation of resources towards more downstream activities and less towards upstream activities.

“We believe it will be downstream activities driving investments in the oil and gas sector,” he says.

UMWOG’s Rohaizad, meanwhile, argues that companies should work towards reducing reliance on Petronas for contracts, and start looking beyond the local market for jobs.

“It is unfair to Petronas if all of us ask for contracts in these bad times, knowing that it is also in a tight position now,” he says.

There are 3,613 Petronas-licensed companies in the country as of August 2015.

According to Rohaizad, there are opportunities overseas as some countries, especially in the Middle East, are still continuing investments, despite the decline in oil prices.

Uzma’s Kamarul shares the same sentiment, noting that even within Asean, the oil and gas sector is still busy in Thailand and Indonesia, as the costs of drilling or production there are low.

All said, a rebound in crude oil prices is an eventuality.

But it will likely be a slow L-shaped recovery, as the MPRC sees it and as per the International Energy Agency’s forecast of a rebound to US$80 per barrel only by 2020.

So, till the storm passes by, companies will just have to take a step back to reorganise to stay relevant. It will be a survival of the fittest.

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