‘Unrealistic valuations’ are slowing down consolidation efforts in the sector

By MARK RAO / Pic By HUSSEIN SHAHARUDDIN

The oil price rise has all but practically bury the prospect of the much needed consolidation in the sector already saddled with excess capacity, as valuation rises to level which would turn off any potential buyers.

Oil prices had risen from slightly below US$30 (RM117) a barrel in early 2016 to US$65 presently, over a 100% jump, and suddenly making oil and gas (O&G) companies more expensive in the valuation.

The state-owned oil company Petroliam Nasional Bhd (Petronas) had been pushing for consolidation in the industry that has been plagued with excess capacity, inefficiencies and too many players. O&G companies mushroomed after oil prices rose above the US$100 level in 2011. However, the drop in crude prices since 2014 had left jobs scarce as oil companies slashed their capital expenditure.

An industry analyst said the “unrealistic valuations” by the asset sellers are slowing down consolidation efforts in Malaysia’s O&G sector.

“With oil prices performing at higher levels this year, O&G assets have gained value on paper. So, sellers are holding out for better offers,” the industry expert told The Malaysian Reserve (TMR).

“Sellers are leveraging on the higher oil price environment for better valuations, but it is this that is preventing many merger and acquisition (M&A) deals from going through,” said the analyst.

Petronas president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin said last week that the state-owned oil firm will continue to encourage consolidation in the industry.

“Going forward, we still need competitive and big companies to serve the industry in Malaysia as well as the region,” he was reported as saying.

However, the industry continued to lag behind in consolidation as big players were occupied to shore up their balance sheets.

Many of the larger players are facing tight cashflow and high debt levels, making merger and consolidation a difficult task to execute.

JF Apex Securities Bhd senior analyst Lee Cherng Wee said the bigger companies are trying to boost their balance sheets as the operating environment remains challenging.

“Several companies do not have the cashflow required to pursue M&As. They are also saddled with high debt and gearing levels,” Lee told TMR.

“These companies are more focused on riding out the downturn (which sees capital spending from oil majors continue to lag behind the uptrend in oil prices).”

He said two factors are required to boost consolidation — a financially-troubled company with decent assets

looking to sell, or two companies who see synergistic bene- fits from a merger.

Huge capital requirement had been cited as one of the reasons behind the aborted merger plans between UMW Oil and Gas Corp Bhd, Icon Offshore Bhd and Orkim Sdn Bhd last year.

Oil prices are expected to stay above the US$60 per barrel level this year, supported by OPEC and non-OPEC production cuts, and geopolitical issues in major producers like Venezuela. However, prices are expected to come under pressure as the US ramps up its shale production.

Buyers are concerned with the continued uncertainty surrounding the direction of oil prices, while several O&G companies continue to struggle with losses and the lack of work.