Long road ahead for O&G industry, say analysts

O&G service and equipment companies would still have to compete in an arid operating environment


IT MIGHT have been a rough ride for the oil and gas (O&G) industry during the last couple of years, but things seem to be looking up as employment activities among the players are on the rise.

Oil prices are also trending higher, while supply and demand dynamics continue to undergo a more positive rebalancing period.

The worst is seemingly over for the industry, but the O&G service and equipment companies would still have to compete in an arid operating environment as low levels of activity and expenditure are expected to persist in the near- to mid-term.

Despite all the improvements, the 2014 oil price crash remains fresh on the minds of investors, oil majors and O&G firms alike.

Higher competition and niche capabilities are expected to prevail in 2018.

Petroliam Nasional Bhd (Petronas) is maintaining a conservative outlook over the next three years, budgeting its expenditure on a US$50 (RM205) to US$60 per barrel price range despite oil prices now sitting above the US$60 per barrel mark.

According to the national energy company’s three-year activity outlook from 2018 to 2020, the upstream sector is expected to average 1.7 million barrels of oil equivalent per day over the next five years.

Petronas stated that floating offshore facilities, structural installation of floatovers, central processing platforms and hydraulic workover units will be the most challenged segments during this period.

Frost & Sullivan Asia-Pacific senior director Subbu Bettadapura said Petronas is also adopting a conservative outlook for its 2018 to 2020 planning due to the highly volatile oil price environment.

Subbu added that the activity level in the upstream segment over this period will be lower by approximately 100,000 barrels per annum compared to what was achieved during 2012 and 2014.

“Going by the very transparent 2018 to 2020 outlook report provided by Petronas, it is evident that the O&G service companies will have to compete harder to meet their revenue targets,” he told The Malaysian Reserve (TMR) in an email reply.

In this scenario, O&G companies with diversified as well as niche capabilities can better manage the competitive landscape amid limited work opportunities.

“Companies that provide more than one service would be better placed (than other players in the industry),” Subbu said.

“Companies involved in the fabrication business would benefit as there are limited companies that can cater to the requirements.”

He said that pipeline and offshore support businesses will have a slightly negative outlook due to the lesser number of available projects, coupled with a large number of service providers competing for these projects.

Low activity and low capital will likely continue to define the market.

After peaking at US$114.81 per barrel on June 20, 2014, oil prices plunged by 57.5% to US$48.79 per barrel on Jan 23 the following year as a global recession curtailed demand for energy across most economies.

The downturn saw major O&G projects aborted and listed firms overinvested and consequently saddled with debt.

Despite oil prices trending higher since June 21 this year when prices were at US$44.82 per barrel, the low levels of capital spending observed in the industry is predicted to continue until confidence returns to the market.

JF Apex Securities Bhd senior analyst Lee Cherng Wee said that oil prices are higher now, but it will take a while before oil majors resume spending.

“Only when oil prices stabilise and there is less uncertainty in the market will we see oil majors start spending again.

“Confidence will return when supply and demand rebalance in the market. In the meantime, the O&G industry is to remain flattish in the nearto mid-term,” Lee told TMR.

He said the decision to extend production, cuts via oil cartel OPEC, coupled with the challenges brought on by shale gas production, indicate that the rebalancing is still ongoing.

Established players in the industry including Sapura Energy Bhd and Muhibbah Engineering (M) Bhd are said to benefit from the competitive but low-activity operating environment as their built-up capabilities and sizeable orderbooks help them weather the downturn.

Sapura Energy slipped into the red for its third quarter ended Oct 31, 2017, due to the prolonged low levels of capital spending weighing down its engineering and construction (E&C) and drilling divisions, prompting investors to reduce their exposure to the company.

Performing at a five-year historic low in terms of share price, the O&G service provider is predicted to recognise further provisions at its E&C and drilling divisions in the next quarter due to lower utilisation rates.

With an outstanding orderbook valued at RM15 billion, coupled with positive cash flow from operations, the company should be able to cope with the downturn at least within the near- to mid-term.

However, companies with negative cashflows and large amounts of accumulated debt are in a less favourable position, many of whom are looking to restructure their debt to avoid liquidation.

This year, for instance, saw Nam Cheong Group Bhd, Alam Maritim Resources Bhd and Perisai Petroleum Teknologi Bhd seeking assistance from the Corporate Debt Restructuring Committee with the hope of extending the period of the loans granted to them.

Finding an amicable solution between listed O&G firms and financial institutions will be a challenge, as the former had cited the lack of support from the latter as one of the key issues facing the industry.

With Petronas favouring a market-driven approach to consolidation and capital reallocation in the industry, this issue is unlikely to resolve itself in the near future.

Petronas’ call for a leaner industry via consolidation and economies of scale will further see a mix of survivors, casualties and outperformers, with the extent and scale depending much on market forces.

Consolidation activities are only expected to pick up in the coming three years after mismatched valuations, reluctant lenders and unattractive assets previously slowed down such exercises.