This article first appeared in The Edge Financial Daily, on May 23, 2016.

GEORGE TOWN: After slipping into the red in the last financial year ended Dec 31, 2015 (FY15), Wah Seong Corp Bhd expects FY16 to be another challenging year as business continues to be affected by low oil prices.

Managing director and chief executive officer (CEO) Chan Cheu Leong said the group’s business is hit as oil and gas (O&G) players have cut their capital expenditure (capex) as a result of low oil prices.

“Oil prices have been on a downtrend since June 2014, and had shown some signs of recovery last year, only to slump once again this year.

“So [it boils down] to [the] fundamentals. If there is a recovery in oil prices, you would see demand for our products pick up,” he told reporters after the company’s annual general meeting here last Friday.

After reaching a peak of US$112 per barrel in June 2014, crude oil benchmark Brent began falling. It averaged US$52 in 2015, and tumbled below US$27 (RM110.70) in February this year, before recovering to near US$50 currently.

Wah Seong provides pipe coating services, engineering, exploration and production under its O&G division Wasco Energy Ltd, which is its prime business. The group also has interests in renewable energy, industrial trading and services.

Chan said Wah Seong had rationalised its operations in line with the current oil price environment.

“For FY16, we will be looking at disposing of non-cash generating assets, not just for the O&G division, but across the group,” he said.

The group reported a net loss of RM11.87 million for FY15 (its first net loss in five years), against a net profit of RM147.11 million for FY14, as a result of impairment losses on its O&G rental fleet.

Revenue fell 24.6% to RM1.83 billion, from RM2.44 billion in FY14, due to a lack of projects as a result of deferment of capex activities by O&G companies.

Nevertheless, Wah Seong deputy managing director Giancarlo Maccagno said the group will be focusing on the geographical expansion of its core competencies.

“The group remains positive on [its] long-term growth, having secured the US$39.5 million Johan Sverdrup project from Statoil ASA, Norway, and a deepwater, offshore insulation project in the Gulf of Mexico valued at approximately US$74 million, which will start sometime in the fourth quarter of this year.

“Our new plant in Regina, Canada — with our partner Evraz Inc NA Canada — which will be commissioned in August this year, already has jobs in hand, while our plant in Anjar, India — with Welspun Corp [Ltd] — has already coated its first concrete coated pipe on March 31, 2016 ... so basically these are new revenue streams from these new geographical areas,” said Maccagno, who is also Wasco’s CEO.

The contract with Norwegian oil giant Statoil marks the second contract for the group after the successful completion of its US$198 million Polarled development project in April 2015.

“This second project with Statoil is basically for pipe coating. The pipes are coming from Japan, so we will do the coating at our Kuantan plant and ship it to Norway.

“Some of the pipe shipments have already arrived, but we will start the coating somewhere in September or October this year, and are targeting to finish by May next year,” said Maccagno.

In a March 24 note on Wah Seong, PublicInvest Research said the group’s order book as at the fourth quarter ended Dec 31, 2015 stood at RM894 million, comprising 54% from O&G contracts, 29% from renewable energy, and 17% from industrial trading and services.

“Our concerns still remain about the group’s high order book burn rate, which would continue to shrink the group’s top line assuming new projects are not secured consistently, largely affected by oil price sentiment.

“We maintain that the group’s execution capabilities remain sound and would be a beneficiary of new contracts upon higher market activities,” said the research firm.

Wah Seong shares closed unchanged at 72.5 sen last Friday, with a market capitalisation of RM560.28 million. The stock, which was trading at RM1.28 a year ago, has fallen 43% since then.