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

MALAYSIA-based oil and gas outfit De Raj Group AG has just received the requisite approvals for a listing on the Frankfurt Stock Exchange in Germany.

When asked why the company opted for a listing so far from home, CEO Vaidyanthan Nateshan says things are difficult in Malaysia, referring particularly to the debt market.

“It’s not the equity market that is tough, it’s the debt market. We are well capitalised and need financing for executing projects. The Malaysian debt market is dead … asset cover here is 2.5 to 3 times while in Europe, it is 0.8 times,” he tells The Edge in a short phone conversation last Friday.

“We have bankers telling us they won’t touch oil and gas companies with a barge pole, so I’m taking the company to Europe.”

One of De Raj Group’s shareholders, Nagendran Nadarajah, is certainly familiar with the local capital market. The businessman had owned Perisai Petroleum Teknologi Bhd years ago and had listed it.

More jobs but no financing

Last month, Tan Sri Mokhzani Mahathir, a long-time investor in oil and gas, sold out of Sapura Energy Bhd. Last year, he exited Yinson Holdings Bhd. Reports have it that he does not see the oil and gas industry turning around any time soon and would rather invest in other industries.

In October, Amir Hamzah Azizan decided to leave offshore service provider Icon Offshore Bhd for Khazanah Nasional Bhd’s Themed Attractions Resorts & Hotel Sdn Bhd. Why Amir left is anyone’s guess but after 27 years in the oil and gas industry, his departure raises questions.

Dialog Group Bhd executive chairman Tan Sri Ngau Boon Keat, the first local engineer in Petroliam Nasional Bhd, explains that with the decline in upstream projects and investments, banks will have to focus on good projects and businesses that have sound fundamentals and satisfy the risk criteria.

Dialog has not had any issues with financing, according to him.

A spokesperson for Dayang Enterprise Solutions Bhd sums it up when he says, “The last three years were the most difficult and challenging times that we have ever experienced over the entire 37 years since our inception in 1980.”

This could explain the cautious stand taken by the banks and financial institutions.

Deleum Bhd CEO Nan Yusri Nan Rahimy acknowledges that the banks have been more cautious in their lending to the oil and gas sector in recent years.

Meanwhile, Datuk Kamarul Redzuan Muhamad, CEO and managing director of Uzma Bhd, opines that it appears to be more difficult for oil and gas companies to get financing nowadays compared with when crude oil prices were above US$100 per barrel. “This could be because there is no indication of where the industry is going,” he tells The Edge.

Kamarul adds that the amount of work coming on stream now is considerably more than what was available two years ago, which might raise hopes of less harsh treatment by banks.

Singapore banks are said to be less stringent with their clients than their Malaysian counterparts, which, it seems, is after some intervention by the Singapore government, although this cannot be proved.

At home, some oil and gas sources say the Economic Planning Unit (EPU) in the Prime Minister’s Department, which is headed by Datuk Abdul Rahman Dahlan; the Malaysia Petroleum Resources Corporation (MPRC), the industry development agency under the Prime Minister’s Department; and Petronas are looking at assisting local players with their banking requirements.

Unfortunately, messages and calls to Abdul Rahman went unanswered.

While details are scarce, one source says the requisite data will be available with the MPRC 100, which is a ranking of the top publicly traded and privately held oil and gas services and equipment (OGSE) companies. MPRC 100 is released either at the end of the year or in March.

“With the release of the MPRC 100, the data on how well or badly the companies are doing will be available. From what we know, it’s pretty bad … then, they (MPRC, EPU and Petronas) can act on it,” an industry player says.

Not the same fate for all

But then, not all the companies seem to be facing difficulty in obtaining financing from the banks.

Barakah Offshore Petroleum Bhd president and CEO Nik Hamdan Daud says, “Our bankers have been supportive in the last three years (when oil prices came tumbling down). Working capital lines have always been made available to our projects. We also get good support from our bankers on our vessel loans. (We have) deferred principal repayment for two years until 2019 amid the current low market demand for offshore vessels.”

Barakah’s annual report reveals that the company’s principal bankers are Malayan Banking Bhd, Export-Import Bank of Malaysia Bhd, Affin Bank Bhd and AmBank (M) Bhd.

The largest shareholders of Barakah are Nik Hamdan, with 38.9% equity interest, Sarawak-based Samling group with a 13.6% stake and Felda Investment Corp Sdn Bhd with an 8.91% stake.

Similarly, a spokesperson for Dayang Enterprise Holdings Bhd says banks are still supportive and lending, albeit only when supported by contracts in hand. “We must add that local banks have had better appetite than foreign banks in the last few years ... foreign banks are putting on the brakes, tightening the bolts and nuts and this invariably is not helping the industry during this crucial time.

“For an asset-intensive industry, certain categories of assets, like vessels, would have their valuations greatly reduced and breaches of loan covenants would become common and it is in these areas that it is only fair that bankers give their indulgence,” he says.

Dayang’s largest shareholders are Sarawak-based Naim Holdings Bhd, with a 29.06% stake, the Ling family (25.25%) and Tengku Yusof Tengku Ahmad Shahruddin (7.52%).

“Barakah and Dayang do not have the EPF or PNB as shareholders. Not exactly strong parentage to warrant such treatment from the banks,” a fund manager says.

Petronas Activity Outlook

Even the Petronas Activity Outlook 2018-2020, which was released earlier in the month and made public for the first time, has many functions.

Other than to keep the oil and gas players aware of the jobs being offered, it also highlights to the financial institutions the availability of jobs on the local front, helping to allay whatever fears they may have (see story on Page 72).

Dialog’s Ngau, through an email, tells The Edge, “Petronas is a seasoned and professional integrated oil and gas company that has lived through the cyclical variations of the industry in the past. This report demonstrates that it has a sound grasp of the current and medium-term environment and a robust plan to progress successfully in this uncertain climate.

“Its continued investment and careful management of upstream and downstream segments provide direction and opportunity for Malaysian companies and foreign investment.”

When asked what he thought of the Activity Outlook, Ngau says, “It has particularly highlighted the current investment at the Pengerang Integrated Complex (PIC) and the opportunity for continued development of Pengerang into a regional downstream oil and gas hub, which will spur the growth of Malaysia’s oil and gas downstream sector, propelling the country into a new frontier of technology and economic development.

“The PIC is also expected to capitalise on the growing need for petrochemical products in Asia for the next 20 years.”

Barakah’s Nik Hamdan says of the Activity Outlook, “It is quite positive. Several significant contracts are under bidding now, which shows its commitment to roll out more projects.”

Barakah recently signed a consortium agreement with Samling Energy Sdn Bhd and Brooke Dockyard and Engineering Works Corp to jointly bid for oil and gas-related projects in Sarawak.

Samling Energy and Brooke Dockyard are Sarawak-based companies while Samling group has a 13.5% stake in Barakah.

“From Deleum’s perspective, the Petronas Activity Outlook outlines the activities. It’s quite straightforward but these are proposed activity plans; we have to see them rolled out and implemented,” says Nan Yusri.

“What is not clear are the factors that govern it. If the price of oil changes, Petronas will reassess the situation. We have to monitor the factors that govern the plan,” he says in a brief conversation with The Edge.

Deleum has been in the news lately

In October, Deleum, via its 60% unit Deleum Primera Sdn Bhd, was awarded a maintenance, construction and modification contract for gas structures in Peninsular Malaysia by Petronas Carigali Sdn Bhd. This could be worth anywhere between RM750 million and RM1 billion.

Nevertheless, the margins for these jobs seem tight, largely because of competition.

Petronas has some 3,900 companies registered as its contractors. Norway, which has a similarly sized oil and gas industry, has a mere 700 companies.

This has resulted in a call for consolidation within the industry.

Uzma’s Kamarul says, “It means that people have to work better and people have to have better capabilities. Like it or not, what will happen is the natural attrition of those who are not capable.

“Petronas is ensuring this happens by bringing the bigger contracts; people will say smaller companies are being sidelined, but you need this kind of thing … this is the right time to do it.”

Thus far, the only recent attempt at consolidation was a plan to merge Permodalan Nasional Bhd-controlled UMW Oil & Gas Corp Bhd with Ekuity Nasional Bhd’s Icon Offshore Bhd and Orkim Sdn Bhd, but the deal fell through.

Other than the above, the only sizeable merger was when Dayang made a general offer for Perdana Petroleum Bhd in 2015 — just after oil prices crashed.

The Dayang spokesperson reminisces on the trials and tribulations after the huge RM1.16 billion takeover offer for Perdana.

“We quickly reverted to consolidation mode and essentially looked at ways of curtailing costs to sustain the onslaught of rate cuts and discounts. It is a survival of the fittest game as well as a time to demonstrate who can sustain longer and better. For us, we truly adhere to the fact that when the going gets tough, the tough get going.

“It is true grit and determination that has got us through this far, coupled with the fact that our clients and shareholders were understanding and supportive of our measures. We believe we may have seen the worst and the worst is over!” he says.

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