Oil prices higher but O&G firms still struggling

O&G service and equipment firms need to make tough choices to stay afloat

by MARK RAO / Pic by BLOOMBERG

STAYING afloat is the name of the game for oil and gas (O&G) service and equipment companies in Malaysia, as low charter rates reduce profits despite oil prices currently stabilising to moderate levels.

With the lack of financial institutional (FI) support and no foreseeable recovery in charter rates, upstream service providers — the worst hit segment during the downturn — will have to make tough choices to stay viable in the industry, according to sources.

Since crashing to a low of US$28.94 (RM121.55) per barrel early last year, oil prices have been rallying since Aug 21 this year from US$48.06 per barrel to reach a five-month high of US$55.16 on Tuesday, as supply and demand dynamics are gradually balanced.

Despite the recovery, O&G companies in the upstream segment are struggling to cope in the “lower for longer” oil price environment, with many listed firms operating in the red while retaining negative cashflows and defaulting debts.

A research analyst said upstream service providers will be challenged to improve their bottom line as charter rates remain low, despite higher utilisation of assets.

“What we saw happened last year, was companies recognising impairments which necessarily weighed down results.

“However, based on the firsthalf results posted this calendar year, listed firms are still not doing well from an operational point-of-view,” the analyst, who declined to be named, told The Malaysian Reserve (TMR).

The source said that utilisation of assets is presently high in the region, with drilling rigs operating at a 70% utilisation rate and offshore service vessels at between 65% and 75% rate.

The analyst said the issue now is that low charter rates are straining the industry that resulted in the retention of losses in the affected companies’ bottom lines.

“Based on what we are observing, the upstream sector is not out of the woods yet,” he added.

Meanwhile, downstream players — namely Petronas Chemicals Group Bhd, Petronas Dagangan Bhd, Petronas Gas Bhd and Gas Malaysia Bhd — have acclimatised to the new norm, being the primary beneficiaries of a low oil price environment while coping well with the recovery in oil prices.

Select players in the upstream segment have also fared well in the present downturn, with companies like Bumi Armada Bhd that had managed to turn in profits this year after accumulating losses in 2016.

For companies that remain challenged in the new industry norm, seeking FI support that are mainly provided by banks will be the key in ensuring sustainability.

Both Alam Maritim Resources Bhd and Perisai Petroleum Teknologi Bhd have sought the assistance of the Corporate Debt Restructuring Committee (CDRC), an agency under Bank Negara Malaysia that is tasked in mediating between corporate borrowers and financial creditors, to find amicable resolutions to their respective outstanding debt.

The research analyst said companies like Icon Offshore Bhd and Barakah Offshore Petroleum Bhd have likely undertaken some form of debt restructuring to better manage their books.

Affected players are also continuously downsizing and trimming operations to stay afloat.

However, an industry source said CDRC will only accept firms after a preliminary risk study is conducted to determine that the company does not retain negative cashflow and is not idle.

“The companies given CDRC aid are those that are expected to be financially viable post-restructuring,” the source, who declined to be named, told TMR.

While extending the loans given to these debt-saddled O&G firms is the ideal solution to the issue, many banks remain cautious about the O&G industry, with the bulk of impairments recognised by FIs in Malaysia coming from the sector.

The majority of Malaysian banks are further intending to reduce their exposure to O&G-based loans.

With national O&G company Petroliam Nasional Bhd calling for industry players to be leaner and fitter in the new “survival of the fittest” landscape, there’s a risk of losing too many players that would leave the industry unequipped in the wake of a possible recovery.