New consolidation push

  • Energy
  • Saturday, 23 May 2020

Yield play: An offshore support vessel of TAS group. The Malaysia Offshore Support Vessel Association has floated an idea to Petronas to set up a business trust of O&G assets.

A PROPOSAL for Petroliam Nasional Bhd (Petronas) to set up a special-purpose vehicle (SPV) to take over the assets of ailing oil and gas (O&G) companies has created a stir in the industry.

Initially, there was some confusion as to which party – the industry players or Petronas – had come up with the proposal. The question was answered when the Malaysia Offshore Support Vessel Association (Mosva) clarified that it had prepared the contents of the presentation deck that was with Petronas.

So, the proposal is now in the hands of Petronas.

Then comes the next question: is Petronas, the national oil company, seriously considering the proposal?

So far, there is no indication from Petronas if the proposal would be given any serious consideration.

“Like any other proposal, the implications are being looked into from the strategic, financial and tax angles, ” says a source.

According to reports, Mosva floated the idea to hasten the consolidation process within the industry. The fear is that many may not survive the turmoil that the O&G industry is going through now.

The logic behind an SPV that acts like a business trust is that it could be a way out for those wanting to exit the business.

Consolidation is definitely something up Petronas’ alley, as it has been calling on the industry to do so since 2015.

It would have been the perfect time to do so back then due the oil price rout, which saw the Brent plunging from US$110 in 2014 to US$30 in 2016.

But that did not happen, as industry players preferred to go it alone and underwent restructuring and recapitalisation, which left the O&G industry as crowded as it is.

The past several years have not been kind to O&G companies and at the rate things are going, it will not be getting easier anytime soon.

Most of them have yet to recover from the aftershocks of the previous oil price plunge and the first quarter of 2020 itself has gotten them on a roller-coaster ride with the coronavirus (Covid-19) pandemic coming in as the main factor in destabilising oil prices.

And this is where a consolidation is becoming more of a necessity, with some industry players scraping the bottom of their war chests to weather through the challenging economic environment.

But questions have been raised about the logic behind Mosva’s proposal as to how it would help the consolidation of the industry.

A trust normally consists of appreciating assets and in the case of OSV companies, their vessels itself are depreciating assets.

This is definitely not an easy plan to execute and there will be a lot of things that needs to be looked into if Petronas were to consider the proposal.

An industry player said Petronas will need to structurally change how the OSV space operates if they plan to set up the business trust.

Another said this may be a good move to help free up some cash for the companies to enable them to bid for new projects.

“But this strategy of adopting an asset-light model goes against the grain of building a robust O&G industry, ” the spokesman said.

Meanwhile, TH Heavy Engineering Bhd chairman Izad Shahadi Mohd Sallehuddin says it will be interesting to see how this would be structured with so many stakeholders involved and a lot of things needing to change first before such a business trust can be set up.

“Also, the asset class by nature depreciates over time, so it may be a bit more difficult to structure a business trust.

“Business trusts are usually viewed as stable yield plays. For OSVs, there are a lot of risks involved, as contract values depend on the oil cycle and the duration can be shortened, ” he says, adding that it will be riskier versus a business trust for a tanker which is chartered for a long term at a fixed price.

On the flip side, Izad agrees that consolidation needs to happen, as the market is getting crowded for a smaller number of jobs with lower margins.

He has not seen Mosva’s proposal but believes the objective is to facilitate consolidation.

Asked if the move will be seen as bailing out OSV players, Izad says it will be more of Petronas helping local players adapt to the new market environment.

“After all, Petronas is the national oil company and has done a tremendous job in developing the local O&G industry.

“Even in the last oil market crash in 2016, Petronas had been very supportive of local players, and it is in the best interest of the country to see both Petronas and local players emerging stronger after the drastic downcycle we are witnessing currently, ” he says.

Meanwhile, a rather peculiar point about the proposal is that a lot of OSV players are not even aware of such a proposal by Mosva, which was presented to Petronas recently.

Several major OSV names spoken to claim they were either not involved nor were they in the know about the proposal.

This includes Icon Offshore Bhd, the country’s largest OSV provider.

Maybank IB Research pointed out in a research report that the group categorically affirmed that it was not consulted over Mosva’s proposal to Petronas to consolidate the OSV market in Malaysia via the setting-up of an OSV Trust.

While industry players are distancing themselves from the proposal, the proposal is on the table and is being studied to determine its implications and benefits.

It is a long, long way from a done deal.

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