Time of reckoning

  • Energy
  • Monday, 20 Apr 2020

Bumi Armada's vessel

PETALING JAYA: The outlook for the oil and gas (O&G) sector remains bleak for the year, fuelling speculation of another round of restructuring.

Oil prices are still showing no signs of recovery and coupled with the higher levels of debt undertaken by industry players following the 2014/2015 crash, everything points to more corporate exercises to stretch out repayments.

Companies in the industry have been battered in the double whammy that is the coronavirus (Covid-19) pandemic and the unexpected price war between Saudi Arabia and Russia early last month.

This led to the downward spiral of the Brent crude oil price since January, having dropped 57.22% year-to-date to US$28.34 per barrel as of Friday’s close.

Malaysian industry players were dealt with another blow when Petroliam Nasional Bhd (Petronas) said it anticipated disruptions in the rollout of its projects, in which it was expected to spend between RM26bil and RM28bil this year.

This combination of negative forces could force a long overdue consolidation amidst the crowded O&G sector.

Kenanga Research head Koh Huat Soon said there were increased risks of restructuring within the sector should oil prices remain weak.

“We saw how the oil price rout in 2014 to 2015 impacted the likes of Ezra, Perisai Petroleum and Scomi Energy that defaulted on loans.

“So we may see similar situations in highly geared companies if price weakness prolongs, ” he told StarBiz.

He added that banks seemed more accommodating this time around as Bank Negara has called on them to provide moratorium as relief measures from the current turmoil, so there may be more avenues for stressed companies to refinance.

Koh said that ultimately, the oil price has to recover to well above US$40 for lasting stability to return.

“The concern now is whether we’ll see that soon (this year), given that even post-Covid containment, reduced travelling and hence energy consumption may be the norm.

“And with Petronas delaying its capex, it is worrying especially for upstream operators. Consolidation may happen with weaker players who are unable to raise funds having to sell their assets, ” said Koh.

Ernst & Young (EY) said industry players emerging from the downturn may not have the financial resources to withstand the external shock as banks are more likely to tighten lending, worsening the operating landscape within the industry.

It said the next wave of restructuring is necessary and is considered more urgent now than before.

“Regardless of whether there will be a swift rebound in the sector, another round of restructuring is necessary to address the fundamentals in the O&G sector, a mismatch of demand and supply and the levels of debt carried by the oil field service (OFS) companies.

“When we tracked 29 publicly listed companies operating within the sector, we observed that in aggregate, the debt level had increased in the last three years, while earning qualities remained depressed.

“Clearly, this further supports the need for another round of restructuring, ” it said in its EY Transaction Insights report on the O&G sector.

Checks on the latest financial statements of some companies showed that their debt levels have risen at least over the past year.

Bumi Armada Bhd for example, recorded a 111.42% increase year-on-year (y-o-y) in its long term debt from RM3.32bil to RM7.01bil as at the year ended Dec 31,2019.

This was after it converted a huge chunk of short term debts to long term liabilities after its operations in the North Sea became operational.

Dayang Enterprise Holdings Bhd had a huge jump in long term loan and borrowings from RM24.43mil as at end-2018 to RM697mil as at end-2019. It was largely due to capital injection into its subsidiary Perdana Petroleum Bhd.

Serba Dinamik Holdings Bhd’s long term borrowings rose more than two fold from RM1.11bil to RM2.95bil while Yinson Holdings Bhd’s was up 22% from RM2.75bil to RM3.35bil.

Yinson’s debt is higher due to the company winning more floating, production, storage and offloading (FPSO) contracts.

For Sapura Energy Bhd, it saw a 23.32% reduction long term borrowings from RM11.15bil as at Jan 31 last year to RM8.55bil as at Oct 31.

Icon Offshore Bhd and Velesto Energy Bhd also recorded a dip in long term debts by 32.34% and 27.25% to RM34.09mil and RM980.96mil respectively.

EY said that the scale of restructuring was now no longer confined to a specific OFS company but rather, to a sector-wide restructuring, involving three key drivers - the consolidation of several OFS players, access to new capital from non-traditional investors, and banks’ compromise on the debts.

“It’s important to note that the consolidation will not just reduce the number of players in this industry as it will also reshape the O&G sector in Malaysia by introducing perhaps, a private-equity style of management to the newly consolidated entities that focus on value creation.

“However, we note that merger and acquisition attempts during the last downturn did not materialise, largely due to pricing gaps and the levels of debt that continue to remain in OFS companies’ books, ” EY said, adding that for consolidation to take place, both OFS companies and banks will need to be prepared to undertake a write-off on their assets and debts respectively, so that it would make commercial sense for capital providers to participate in the M&As.

It is unlikely that the sector would see a significant recovery anytime soon, especially with Covid-19 continuing to wreak havoc globally, leading to sluggish demand.

There would be no other choice for industry players than to brace for impact.

During a recent high level O&G meeting call, the key emphasis was on cash flow and the vital need to have enough to roll for the next one year.

Sources said the industry players were prepared to cut off all loss making units in a bid to conserve cash flows.

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restructuring , oil , gas , O&G , Kenanga Research , Bumi Armada ,


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