Consolidation among O&G service providers still lagging

Choosing to hold on to assets for better sell-out prices in the future risks facing liquidation


Unattractive assets, reluctant lenders and mismatched valuations are slowing down consolidation among companies in the oil and gas (O&G) service industry, with the 2014 oil price crash still weighing heavily on investors and stakeholders’ minds.

Players who choose to hold on to assets for better sell-out prices in the future are doing so at the risk of facing liquidation, as remaining financially viable amid the continued industry downturn is a significant challenge, analysts said.

AmInvestment Bank Bhd O&G analyst Alex Goh said the two main factors hindering merger and acquisition (M&A) exercises within Malaysia’s O&G space are the type of assets that are available and the valuations.

Goh said the majority of assets in the offshore support vessels (OSVs) segment are unattractive to potential buyers as the vessels do not meet modern market requirements.

“For OSV players and ship owners especially, vessels retained in the fleet are generally five years and above in age and continue to get older.

“To meet market requirements today, these vessels need to be regulation-ready and achieve the necessary safety and quality standards.

Buyers are less likely to take on ageing assets,” he told The Malaysian Reserve (TMR).

He said securing loans and financing to fund said M&As will be a challenge, as it is in the self-interest of banks to avoid exposure to a risky sector with no clear recovery in sight, especially in the offshore sector.

In line with oil prices slumping over 50% since 2014, reaching a peak of US$114.81 (RM482.20) per barrel on June 20, 2014, before crashing to a low of US$28.94 early last year, valuations of listed O&G service and equipment firms took quite a battering.

Share prices of local upstream players reportedly declined by an average of 67% since June 2014 to the start of this year, significantly higher than the 40% global average recorded over that period.

While oil prices are predicted to stay within a band-width of volatility between US$50 and US$60 per barrel over the next three to five years, this is still a far cry from the glory days of US$100 per barrel.

Goh said many players domestically are valuing their assets based on this peak and are thus holding out for better value.

However, he said the next six months will be a crucial period in terms of whether these players can maintain cashflows at viable levels, amid low charter rates weighing down margins for offshore players.

Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia said the O&G industry looks to be heading to a permanent cost-down environment, as the shift towards renewable energy and hybrid cars balances out demand.

He said this will come at the expense of smaller industry players who are unable to find ways to operate in a lower-margin environment.

“From a buyer’s perspective, it does not make sense to buy an overpriced asset when the market is showing no signs of recovering to its peak,” he told TMR when contacted.

“M&A deals (in Malaysia) are not happening because many asset holders are stuck in the mindset that oil prices will recover to a US$100 per barrel high, even though margins are presently not there to support such high valuations,” he told TMR.