Capital: Sector Of The Year (Oil & Gas) - Under persistent selling pressure

This article first appeared in Capital, The Edge Malaysia Weekly, on December 25, 2017 - December 31, 2017.
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THESE days, when talking about oil prices, the terms “lower for longer” and “the new normal” have become almost mantra-like.

And it is not as if oil prices are in the doldrums. Brent crude has averaged US$54.51 this year and has traded above US$60 per barrel since end-October.

The worst may be over for the oil and gas industry — it had been languishing for the past three years — but not many expect the good old days, when crude was trading above US$100 per barrel, to be back anytime soon.

This explains the persistent selling of oil and gas stocks on the local market, which has battered the share price of many of the companies. The majority of the oil and gas counters are trading below RM1 with eight crumbling to all-time lows this year.

The names Sapura Energy Bhd, Icon Offshore Bhd, UMW Oil & Gas Bhd, Malaysia Marine and Heavy Engineering Bhd, and TH Heavy Engineering Bhd come to mind.

The continued selling pressure has probably made the oil and gas sector one of the worst performers on Bursa Malaysia. Besides a sharp contraction of revenue, the earnings of many of them have been hit by impairments and finance costs.

One of the earliest to be impacted was Perisai Petroleum Teknologi Bhd.

The company’s problems started in October last year when bondholders rejected an extension of the maturity date of its S$125 million (RM377.3 million) debt paper that had a coupon of 6.87%.

Perisai was found to be in default as a result of the minimum coverage ratio covenant, dipping below the requisite ratio of 3:1 in respect of the period ended June 30, 2016. However, the trustee in this case need not take any action and declare the notes due and repayable unless directed by the noteholders.

At a bondholders’ meeting, 70% voted against waiving payments and other obligations.

Things got worse from there as Perisai was classified a Practice Note 17 company after defaulting on the debt paper. In April this year, its largest shareholder — Singapore-based oil and gas outfit Ezra Holdings Ltd — voluntarily filed for bankruptcy under Chapter 11 of the US Bankruptcy Code.

Perisai has until Feb 11, 2018, to submit a regularisation plan to the authorities to address its PN17 status.

Similarly, Alam Maritim Resources Bhd, which specialises in offshore support services, has seen better days. The company is buckling under the strain of heavy borrowings.

For its nine months ended Sept 30, the company suffered a net loss of RM20.27 million on revenue of RM116.70 million. It had cash and bank balances of RM66.45 million, and short-term debt commitments of RM146.90 million and long-term borrowings of RM24.47 million.

Sapura Energy, meanwhile, sprang a surprise earlier this month when it suffered a net loss of RM274.41 million on revenue of RM1.28 billion in its third quarter of FY2018. Its share price took a beating and closed at a record low of 72 sen on Dec 20.

Among the largest oil and gas service providers in the world, Sapura Energy suffered a loss after all its business segments, especially engineering and construction and drilling, slowed down.

On its prospects, Sapura Energy says, “Industry conditions continue to be challenging and the group’s current performance is a reflection of the prolonged low levels of capital spending within the industry … The board anticipates the challenging environment to persist in the short and medium terms.”

TA Securities forecasts crude oil to trade at an average price of US$60 per barrel in 2018 and US$65 per barrel in 2019, backed by improved global demand and sustained production cuts after averaging at about US$55 per barrel in 2017 and US$48 per barrel in 2016.

“Our expectation of stronger oil prices is underpinned by both fundamental and sentimental drivers, namely sustained production cuts by Opec and non-Opec producers and optimism that Saudi Arabia will escalate efforts to champion an oil price recovery,” TA says in its outlook for 2018. The research outfit is “neutral” on the sector.

Much of the gains in oil prices are a result of oil output cuts by Opec and non-Opec producers led by Russia, which started in early 2017 and are slated to last until the end of 2018. Opec and Russia collectively account for over 40% of global oil output.

Yaw Yan Chong, Thomson Reuters supply chain and commodities research (oil) director for Asia, however, points out that the cuts since the start of the year have been minimal.

As at October, total exports by Opec remained high at an average of 33.23 million barrels per day per month, although this includes Indonesia, which suspended its membership in only January this year. This is not far off the 2016 average of 33.23 million bpd/month which included Indonesia.

“My point is that Opec production is still very large despite the cuts … This is the same for Russian production, which averaged 10.94 million bpd/month up until September, which is still an annual record-high, versus the 2016 average of 10.76 million bpd, which was also a record-high at the time,” Yaw says.

An oil and gas industry observer says she is not bullish on the sector. “Capital expenditure is down a lot, which, in turn, translates into fewer jobs, but the number of players remains the same. There has to be consolidation.

“[There seems to be] no light at the end of the tunnel. It’s tough. There’s too little work to go around and there are too many players … just look at the Petronas report.”

The Petronas Activity Outlook 2017-2019, which was released earlier in the month and made public for the first time, does not paint a rosy picture of the industry. Opening up the report may be the national oil company’s way of alerting the players to the difficult climate.

In the period under review, there were 20 greenfield and 30 brownfield projects in the upstream sector, up from 15 and 25 respectively expected in the first Petronas Activity Outlook report.

“We need to reshape the Malaysian oil and gas ecosystem so that the companies that operate here will be more efficient, with the size and economies of scale that will also make them more resilient and competitive globally,” Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin has said.

Thus, while oil prices may have somewhat recovered, the industry players are not out of the woods yet.

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