Oil price collapse could lead to cost pressures, defaults

Malaysian O&G companies are price takers, hence a lot of industry constituents could struggle if prices remain low


THE lower crude oil price is likely to hit contract rates and cashflows leading to potentially higher non-performing loans and impairments, particularly for oil and gas (O&G) companies with weak balance sheets and provide supplementary services to big oil producers.

As crude oil prices fall into the US$30 (RM126) a barrel levels, AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes said the lower price is bound to diminish revenue streams and likely take a toll on the financial capabilities of support service provider companies to service their loan debt.

He said Malaysian O&G companies are price takers, so a lot of industry constituents could struggle if prices remain low.

“I’m not suggesting any company in particular. The same thing is happening in Calgary, Alberta, when oil prices get depressed, the industry as a whole struggles,” he told The Malaysian Reserve (TMR).

He added that oil companies could be facing losses if the situation fails to see a quick improvement.

Calgary-based Houston Oil & Gas Ltd ceased operation in November 2019, leaving more than US$80 million in estimated costs to clean up its orphan wells, pipelines and facilities.

Innes added that when oil market tumbles into bear market territory, investors tend to keenly look at equity valuations of O&G counters.

“Recapitalisation will be a tough slog as the industry has fallen out of favour and with the prospects of much lower earnings per share, investors will shy away from the industry,” he explained.

Depressed oil prices will remain as long as demand activity remains constrained by the Covid-19 spread but a new OPEC+ agreement could nudge oil back to US$45 he added.

Oversea-Chinese Banking Corp Ltd’s economist Howie Lee said, while such a sharp fall in oil price is not normal, and will likely rebound if Saudi Arabia and Russia come to a truce.

However, if both countries continue to assert their position to seize market share, prices are expected to stay depressed for a long time.

Oil exploration could virtually come to a halt as could be simply unprofitable to do so at current or lower prices, he said.

“Expect downstream producers to see a tight squeeze on margins, as prices close in on their costs of production. It will not be surprising to see loan defaults in this sector,” Lee warned.

“If prices stay suppressed, expect a shakeup in the O&G industry, with companies eventually succumbing to divesting in order to raise funds,” he told TMR.

The weak prices will also have an impact on appetite for sustainable fuels, as there is less incentive for companies to switch or engage in research and development. Indirectly, it could also cause delays in biodiesel programmes implementation until the economics deem it more logical.

Hibiscus Petroleum Bhd in its exchange filing yesterday stated the company will seek to preserve cash and revisit its production plans, as well as ask its contractors to further optimise their pricing levels.

The marginal field producer will also look out for merger and acquisition opportunities as major producers rationalise their portfolios.

Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said it is difficult to foresee Brent crude price to recover above US$40 a barrel level for any extended amount of time.

“If Saudi Arabia is as serious as it is suggesting, then oil prices may well settle between US$30-US$35 a barrel this week.

“A deflationary shock to the rest of the world was the last thing needed right now, and the possibility is that this could tip a short recession from the coronavirus, into a longer one,” he told TMR.

Affin Hwang Investment Bank Bhd stated that in the event oil prices remain below US$50 a barrel level, national oil company Petroliam Nasional Bhd (Petronas) could cut its RM50 billion capital expenditure (capex) guidance in 2020, as its current capex allocation is based on crude at US$50 a barrel price assumption.

“We believe Brownfield projects may face lower risks as projects/work scopes are categorised as operational expenses rather than capex. The 2014 oil price crisis mainly impacted the small/mid-cap players which generally rely heavily on Petronas jobs. Fabricators, rigs and offshore support vessels also saw a slower roll-out of contracts and a big slash in daily charter rates,” the investment bank noted in a report yesterday.

The 2014 oil price fall hit local support service providers hard as workflow slowed and many companies left with idle assets and cost pressures.

Some like Sapura Energy Bhd raised billions of ringgit from fresh fundraising exercises and asset sales to revitalise its balance sheet and bid for fresh work.