O&G players, lenders still having nightmares over oil bust

Absence of financial support and uncertainties over oil prices have limited investments

By MARK RAO / Pic By BLOOMBERG

Oil companies, investors and lenders are still reluctant to invest in new fields despite the recent crude price rise as they continue to count the losses from the 2014 great oil bust.

Oil prices plunged from US$115 (RM471.50) a barrel in June 2014 to US$35 in February 2015, forcing hundreds of service providers to the brink of bankruptcy, billions in market capitalisation erased, thousands of workers made unemployed and banks saddled with mountains of debts.

Worries for a repeat of the 2014 oil price plunge are turning into the harbinger for the sector.

An industry insider said the absence of financial support and uncertainties over oil prices have limited investments in new fields and capital spending.

The source said oil companies are milking their current wells despite the limited production, while development of new fields will take two years.

“But these (new fields) are contingent on financing from banks who remain cautious after recently coming out of a loan-impairment cycle of the O&G sector,” said the insider to The Malaysian Reserve.

Local banks have an exposure of less than 3% to the oil and gas (O&G) sector compared to the over RM1.5 trillion overall banking debts.

But the collapse of several Singapore-based O&G service providers had dragged local lenders who arranged the debts papers for these companies. Some of the local banks are still trying to recover the losses as the failed O&G companies sought protection from creditors and were undergoing massive debt and assets restructuring.

Unlike in other countries, local banks are not required to reveal the source of their non-performing loans or bad debts.

The industry insider also said the exploration and production (E&P) players have been muted in their responses to the recent oil price rise.

“Many E&P players have not pulled the trigger to develop new fields and their replenishment rate sits below one time,” said the industry analyst.

“These companies consume their existing reserves, and their earnings and cashflow base will continue to decline,” he said.

Brent crude oil price had jumped more than 55% this year to a high of US$85 per barrel, levels last seen in 2014.

But the feel-good news have failed to influence equity punters to rush to the stock market.

“While there is buying interest of stocks that have a direct leverage to oil prices, namely E&P firms, there has been no massive funds flowing into service providers,” said the analyst.

The source expects that E&P companies like Hibiscus Petroleum Bhd and Reach Energy Bhd could develop fields at a lower cost compared to the previous cycle, as service prices had also tumbled in the last few years.

And service providers make up the bulk of the listed O&G firms on the local stock exchange.

Shares of Sapura Energy Bhd, Bumi Armada Bhd, MISC Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) continue to be depressed despite the recent crude oil prices recovery.

Some of these companies continue to be in the red, posting depressing revenue figures and confronted by subdued activity and low utilisation rates of their assets.

Meanwhile, another market source said investors see the recent oil price rally as a “temporary” glitch and is largely driven by the various geopolitical factors.

“They are concern that prices will come down again when tensions ease,” the market analyst said.

“If you look at the O&G service provider counters such as Bumi Armada, MMHE and even Sapura, we do not see much upside.”

But companies like Serba Dinamik Holdings Bhd has gained, while E&P firms will see immediate upside from the higher oil prices.

Geopolitical tensions and fears over supply shortage are fuelling talks of a possible US$100 a barrel price level.

US sanctions on Iran next month and the alleged death of journalist Jamal Khashoggi by Saudi Arabia could prompt the US to impose sanctions on the latter.

The loss of over 3.5 million barrels per day in US production due to Hurricane Michael and supply losses from Iran and Venezuela are weighing on oil markets.

Oanda Corp Asia-Pacific head of trading Stephen Innes said the International Energy Agency’s estimate of spare production capacity at approximately two million barrels per day should support oil over the short term.

“But the markets know these reserves have never been tested, raising the question of how much extra capacity can be brought online immediately,” he said in a research note.

“In the meantime, until additional supplies are made available, that crimp in quantity should be enough to support oil prices until proven otherwise.”