Offshore service industry remains challenging

Positive quarterly financial results by some O&G service providers do not mean the end of drys pell

By MARK RAO / Pic TMR

The positive quarterly financial results by listed oil and gas (O&G) service providers do not mean the end of the dry spell for the sector, which continues to be bogged down by overcapacity, reduced orders and low charter rates.

Oil prices had climbed to over US$60 (RM252) a barrel last week amid worries over the power consolidation in Saudi Arabia, global crude output cut and upcoming winter season.

Analysts, however, said while certain O&G companies would be able to sustain business into next year, others would not be so lucky.

Offshore service providers MISC Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) posted a stronger third-quarter (3Q) earnings.

MISC’s net profit jumped to RM680.5 million compared to the RM134.2 million posted in the same quarter a year ago. Earnings for the Petroliam Nasional Bhd-controlled company were boosted by one-off gains from the offshore and liquefied natural (LNG) divisions.

MMHE recorded its first profit since the 3Q of 2015 due to the absence of substantial provisions and reduction in losses.

MISC also recorded a higher revenue for the quarter, but income at MMHE slipped 35.4% year-on-year to RM215.35 million.

MIDF Amanah Investment Bank Bhd research analyst Adam Mohamed Rahim said MISC’s focus on its core businesses would help the shipper to survive during a prolonged low charter rate environment.

“Even if we were to minus the one-off gains, MISC’s results still show a recovery,” Adam told The Malaysian Reserve.

“We believe the earnings are signalling a business recovery following the disposal of their tank terminal business at the end of September.”

He said that the company’s third Seri C Class Vessel has started to contribute to its earnings, while two more vessels are scheduled to enter service by the first half of next year.

“Low charter rates will continue to pose a risk to MISC. But given its net fleet growth, especially in its petroleum tanker segment had secured long-term contracts, the company should be able to cushion against the sluggish charter rate,” said Adam.

MISC is likely to weather the downturn, but other players are expected to face challenges. The overcapacity situation is expected to worsen following the OPEC’s signal to commit to their production quotas.

AmInvestment Bank Bhd O&G analyst Alex Goh said the approaching winter season would boost demands for crude oil and increase spot rates.

“Typically, the tanker sector turns in a stronger 4Q as we are coming into the winter session where demand for crude oil picks up. But, LNG gas charters are still mostly locked in for the long term,” Goh said.

He said seasonal factors have influenced MISC’s fiscal performance, but the industry is still weak due to overcapacity.

“With OPEC’s commitment to its production cut quotas we will see fewer shipments from the Middle East to the Far East regions (and worsening the overcapacity situation).”

MISC’s share price rose 4.2% to close at RM7.41 yesterday, while MMHE’s shares closed stronger at 80.5 sen, up 2.5 sen. The marker is anxiously waiting for the results of other O&G players to see whether the worst is over for the sector.