A rise in debt restructuring expected for offshore O&G firms

By MARK RAO Pic by MUHD AMIN NAHARUL

More oil and gas (O&G) service providers are expected to fail, while the viable businesses may seek to restructure their debts as crude prices remain depressed and project roll-outs from operators continue to be scarce.

An analyst at a rating agency said offshore support service providers, with their capital-intensive investment and high exposure to loans, are likely to seek help to restructure their debts.

Malaysian Rating Corp Bhd (MARC) O&G analyst Wan Muhammad Afeeq Amiri said offshore service providers with substantial capital outlay and limited cashflow will find it difficult to service their loan obligations.

“The offshore support service providers have been more susceptible to debt restructuring, given the capital-intensive nature of their businesses that includes vessels acquisition which are largely funded by debt.

“The crisis had led to lower contracts with thin margins, affecting cashflows and consequently, the ability to service debt obligation,” Wan Muhammad told The Malaysian Reserve.

Crude oil prices have not recovered from the slide that began in 2014. In the first-quarter of last year, oil prices dropped to around US$27 (RM115.56) a barrel. Despite oil prices recovering to around US$45 to US$50 a barrel, it is not even half from the peak price three years ago.

Oil operators have been aggressively slashing cost, reducing capital expenditure, limiting the haunt for crude and re-negotiating terms with services providers to stem their profit downturn. State-owned energy firm Petroliam Nasional Bhd (Petronas) had warned there were not enough jobs to go around for all the players.

There are about 3,800 Petronas licensed O&G vendors and service providers in the country. The number of active companies are estimated at around 2,000 firms.

The O&G slump is not expected to end soon, with some analysts expecting the glut and low price to remain for the next two to five years. Petronas has also capped its forecast on the conservative end.

Nam Cheong Group Bhd, Alam Maritim Resources Bhd and Perisai Petroleum Teknologi Bhd were the recent O&G companies that had been hit by the downturn. All three firms are engaged in offshore activities.

The Sarawak-based but Singapore-listed Nam Cheong is Malaysia’s largest shipbuilder of offshore support vessels. It had RM1.84 billion in outstanding debt as of March 31 this year.

Alam Maritim has been granted an extension by the Corporate Debt Restructuring Committee (CDRC) to submit a proposed restructuring scheme by Aug 11, 2017.

Its RM500 million medium-term Sukuk Ijarah was also recently downgraded by MARC to ‘DIS’ after the firm failed to pay its RM30 million sukuk principle payment on July 6. The marine services provider owns and operates 42 offshore support vessels.

Wan Muhammad believes cash-strapped O&G companies are also expected to report losses and will seek help.

“We believe the debt restructuring will not be limited to companies with high debts, but also those that face cash-flow constraints,” Wan Muhammad said, adding that any restructuring would reduce the companies’ short-term obligations and prolong their sustainability.

“While the worst of the oil crisis has abated, we still foresee some companies that will continue to face cashflow problems, juggling between working capital requirement and debt repayment.”

Wan Muhammad said the outlook for these debt-saddled companies is not challenging if oil prices remain between US$45 and US$55 per barrel this year.