This article first appeared in The Edge Malaysia Weekly on December 11, 2017 - December 17, 2017

JUST over a year after we assessed the financial health of 33 listed oil and gas (O&G) companies last October, we conducted a review and found that their performance has not improved in general.

We used three financial metrics to conduct the health check, namely current ratio to measure the company’s short-term liquidity; debt-to-equity ratio to assess its leverage; and interest coverage ratio to determine its ability to service interest payments on its debt.

This year, we reviewed 10 other companies as well (see table). Three companies scored poorly in meeting the three metrics compared with two last year, while seven delivered poor results across two metrics, from eight previously.

The Edge speaks to analysts and fund managers about the health of the industry as a whole.

“The problem is [high] borrowings,” says Areca Capital Sdn Bhd CEO Danny Wong. There are overhang issues, as some players cannot immediately undo the investments made when crude oil prices were high and prospects were good, he adds.

“But I think most companies know what to do with their investment strategies under the current market conditions,” Wong opines. “When companies manage to service their short-term debts, their gearing ratios and the systemic risks are reduced.”

MIDF Research analyst Aaron Tan agrees that many companies made a good effort to restructure their debts. “The majority of rights issues or private placements made by the O&G players over the last few years were done to repay borrowings,” he says.

However, it should be highlighted that 12 companies have negative interest coverage ratios (earnings before interest and tax/total interest expense). This means they are not generating enough cash to service their debts. In addition to the twelve companies, nine, including UMW Oil & Gas Corp Bhd (UMW-OG) and Sapura Energy Bhd, have low interest coverage ratios of less than 2 times.

Even with the unwavering backing of Permodalan Nasional Bhd in its restructuring exercise, UMW-OG is still far from making a full recovery, with the continued subdued charter rates and lack of long-term contracts in the pipeline.

Sapura Energy, whose share price was bashed down after it announced a quarterly loss of RM274.4 million as at Oct 31, has seen its cash pile shrink to RM1.89 billion from RM3.5 billion a year ago. Its net profit for the financial quarter was dragged down by substantially lower revenue — it fell almost 43% to RM1.27 billion — as well as higher finance cost of RM227.46 million, compared with RM190.9 million a year ago.

While the companies know how to manage their financials, the lack of jobs prevents them from having a steady cash flow. Even worse, new funding is difficult to obtain. “New loans are usually ring-fenced by certain projects or contracts,” says Tan.

Inter-Pacific Securities head of research Pong Teng Siew points out that Petronas’ jobs have helped to ease the adverse impact of the downturn in the sector.

However, banks also have a reason to stay cautious about opportunities in the sector’s recovery. “News that relate to the banking and O&G sectors is usually about the level of provisions,” he says.

From a business perspective, the lenders are not at fault, Pong adds. “They are not in the forecasting business and the traditional approach is to wait for the boom before they actually increase their exposure in the sector.”

Unfortunately, when the banks stay cautious, troubled companies tend to languish in the doldrums. For example, Perisai Petroleum Bhd and TH Heavy Engineering Bhd have yet to pick themselves up enough to meet the three metrics. EA Technique (M) Bhd is another example.

Perisai’s 23.01% indirect shareholder Ezra Holdings Ltd filed for bankruptcy in March and later in the month, Perisai drew up a new scheme to settle its debts. As at Sept 30, its short-term liabilities stood at RM1.29 billion — of which RM850.18 million is a US dollar-denominated short-term loan — which is not much less than the RM1.32 billion a year ago.

As at Sept 30, TH Heavy’s short-term debt had reduced to RM295.35 million from RM319.41 million last year. On Nov 5, the company, which is 29.81%-owned by Lembaga Tabung Haji, obtained a third extension to finalise a scheme of arrangement to repay its creditors.

Other companies that performed poorly in meeting two indicators are vessel operator Icon Offshore Bhd and integrated services provider Dayang Enterprise Holdings Bhd.

While the Petronas Activity Outlook 2018-2020 suggests that the overall market is recovering, Inter-Pacific’s Pong says stakeholders still need to see evidence that the capital expenditure of the oil companies is on a major upswing to ensure there is a flow-through of benefits to the support services industry.

In the meantime, can the companies hold on? “Yes, the lack of financing presently will result in missed opportunities. It will slow the recovery, but it is not enough to make things worse,” says Pong.

In that sense, can lenders help break the cycle? Areca’s Wong says the interests of the lenders and the companies are already aligned, but agrees that they can do more with oil prices being higher currently. “If there are more projects ahead, why not?” says Wong.

“If Malaysia’s GDP can grow at such healthy levels, banks as a component of the economy can ride on this growth. More so if the O&G companies are more exposed to foreign banks than local. [But] It should be better for the industry to be financed locally, especially when it is for local O&G projects,” he says.

“With the current oil prices, as long as there are no downside surprises, there should be new explorations. Then the banks will leverage companies that are able to get business,” adds Wong.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.