O&G downturn to weed out uncompetitive players

O&G servicesfirms without required capacities to weather current difficulties are likely to exit the sector


The oil and gas (O&G) downturn is expected to weed out non-competitive companies, while the stronger firms will adjust and survive this depressed oil market environment.

Malaysia Petroleum Resources Corp president and CEO Datuk Shahrol Halmi said O&G services companies without the required capacities to weather the current difficulties are likely to exit the sector.

“This group came in opportunistically [when oil prices were at a high of above US$100 (RM430) per barrel], saddled with some debts, high gearing and have yet to develop the competencies and capabilities to allow them to be really cost-effective,” Shahrol told The Malaysian Reserve (TMR).

“These players have to make the decision whether to stay in the business — knowing that it is going to be quite low for a while, or opt to sell out.”

As of 2015, there were 3,956 Petronas-licensed O&G services and equipment companies and 32 operators. National oil company Petroliam Nasional Bhd (Petronas) acts as the regulator.

Oil prices took a nose dive from the middle of 2014 from about US$100 a barrel to around US$50 a barrel now. While it is around half of the price in 2014, the present price is higher than the below US$30 a barrel price early last year.

The unexpected downturn for the sector had caused billions in losses for companies that had invested heavily in upstream operations.

Despite the gloomy outlook, activities in the down-stream and storage sectors remain strong. Operators are seeking additional storage for their oil.

O&G maintenance companies continue to gain contracts for the already running platforms, while downstream activities are increasing as demands for petroleum related products rise.

Besides production players, offshore support vessels (OSVs) and hook-up and commissioning (HUC) services are staring at a very difficult period.

Shahrol cautioned against classifying the whole industry under one umbrella, as the entire O&G value chain is huge.

“There is also a group of companies that are fundamentally sound, but was at the wrong place at the wrong time, and consequently got into a lot of debt during the capital expenditure (capex) boom,” he said.

“These companies structured their organisations on the assumption of oil prices to trade between US$80 and US$120 per barrel and are now in the middle of restructuring via exercises that could include debt restructuring.”

TMR recently reported that offshore players are the most likely to fall victim due to their sizeable capex. Companies with cashflow constraints will face a difficult period.

Petronas and industry analysts are hoping the oil down-turn and the smaller contract pie will force a consolidation in an industry which is seen to be overcrowded