This article first appeared in The Edge Malaysia Weekly, on March 21 - 27, 2016.

AMID a challenging operating environment, several oil and gas companies could be undergoing consolidation exercises in the near term. One of these is said to be TH Heavy Engineering Bhd, which may be looking to hive off its floating production storage and offloading (FPSO) vessel, Deep Producer 1.

The FPSO is currently on charter to JX Nippon Oil & Gas Exploration at the Layang Development Project, Block SK10, off Sarawak.

The FPSO’s charter commenced in May 2014 and runs up until November 2023. The contract was valued at US$372 million or RM1.2 billion (at the exchange rate then) and $457 million (RM1.47 billion) if JX Nippon exercises an option to extend the contract for another 10 years.

FPSO Deep Producer 1 is 80% owned by TH Heavy. Its sale would leave the company with its fabrication yard and crane business, among others.

Bankers familiar with the deal are aware of plans to sell the vessel.

“There are quite a few companies eyeing the FPSO. It is to be sold via tender exercise,” an executive with a bank familiar with the sale says.

This sale could help TH Heavy financially, depending on the price.

TH Heavy Engineering acquired Deep Producer 1, (formerly the 68,000dwt tanker MV Laurita) in July 2011 at a cost of US$82.5 million, which was about 40% of the US$200 million the previous owners spent building the vessel.

However, the FPSO did not have a locked-in charter contract when it was acquired and cost about RM2 million a month to sustain until it secured a contract.

TH Heavy has been in the red since FY2013. For its financial year ended December 2015, the company suffered a net loss of RM44.79 million from RM100.57 million in revenue. In FY2014, it saw a net loss of RM76.45 million from RM344.12 million in sales.

As at end-December 2015, it had accumulated losses of RM61.7 million, compared with RM16.91 million in accumulated losses in FY2014.

There could also be other issues.

TH Heavy’s parent, Lembaga Tabung Haji, which owns a 29.81% stake,  injected RM275 million into the company via Islamic irredeemable convertible preference shares when the pilgrim fund emerged as the sole subscriber for its rights issue of preference shares, which partly financed Deep Producer 1.

Will the pilgrim fund also let go of the yard and merge it with other players?

Apart from TH Heavy, the seven licensed fabricators include Malaysia Marine and Heavy Engineering Holdings Bhd, SapuraKencana Petroleum Bhd, Brooke Dockyard and Engineering Works Corp, Boustead Heavy Industries Corp Bhd, KKB Engineering Bhd, Muhibbah Engineering (M) Bhd and Labuan Shipyard & Engineering Sdn Bhd.

Although oil prices are creeping up from below US$30 per barrel earlier in the year, the plunge from above US$100 per barrel in 2013 is taking its toll. Oil prices breached US$145 per barrel in 2008.

Analysts and market watchers contacted by The Edge expect some form of consolidation, mergers and acquisitions (M&A) or takeovers in the local oil and gas industry.

“In the case of the marine spread [support vessels], for instance, there was talk of the players merging. Back then it was a merger between Perdana (Petroleum Bhd), Alam (Maritim Resources Bhd) and Icon Offshore (Bhd) that was talked about … size matters,” an industry player says.

Icon Offshore, a 42.28% unit of government-linked Ekuiti Nasional Bhd, would have ideally taken the lead in such an exercise.

Alam Maritim is 35% controlled by Datuk Azmi Ahmad, the managing director and CEO, and Shaharuddin Warno @ Rahmad, the chief operating officer. Both are veteran oil and gas men.

However with Perdana being taken over by Dayang Enterprise Holdings Bhd, plans for the giant marine spread company hit a snag.

In the past, there was also talk of Alam Maritim and Barakah Offshore Petroleum Bhd undergoing some sort of corporate exercise. However, this never took off or was just a rumour. Barakah’s largest shareholder is Nik Hamdan Daud who has a 48.68% stake.

The strength of the parent or controlling shareholder has a lot to do with whether a company merges with another. For instance, Wah Seong Corp Bhd is perceived to be strong with the Tan family, which controls the IGB group, behind it.

An analyst says Deleum Bhd was courted some time ago, but the shareholders managed to fend off the interested party, with Datuk Vivekananthan M V Nathan and Datuk Izham Mahmud holding on to their shareholding of about a third of the company.

Another industry player suggests there could be structural changes to some companies. For instance,  Petra Energy Bhd could let go of its fabrication yard or other businesses and focusing on its marginal oilfield business.

Petra Energy’s earnings have been bolstered by its marginal oilfield business. For the year ended December 2015, Petra posted a net profit of RM51.15 million from RM652.93 million in revenue. In contrast to a year ago, net profit gained 48.34% while revenue inched up 4.57%.

Nevertheless, many  O&G executives, tell analysts they are unlikely to undertake consolidation or M&A as they have already obtained refinancing and thus can weather the storm.

One name that keeps cropping up in talk of consolidation is Bumi Armada Bhd, the fifth largest FPSO player in the world and an established offshore support services vessel operator.

While it is no secret that tycoon T Ananda Krishnan, who has a 34.92% stake, has been looking to hive off his controlling block of shares, it seems he has yet to get the desired price.

Bumi Armada ended trading last Thursday at 78.5 sen, giving it a market capitalisation of RM4.6 billion. In contrast to two years ago, it has lost more than 65% in market capitalisation.

For FY2015, Bumi Armada suffered a net loss of RM234.57 million from RM2.18 billion in revenue. In contrast, in FY2014, the company raked in RM218.69 million in net profit from RM2.40 billion in sales.

As at end-December last year Bumi Armada had deposits, cash and bank balances of RM1.52 billion, compared with RM3.30 billion as at end-December 2104.

During the year in review, its long-term debt commitments stood at RM6.26 billion, up about 21% from RM5.17 billion at end-2014. Short-term borrowings as at end-December 2015 stood at RM1.77 billion, up about RM73% from RM1.02 billion at end-2014. The company’s gearing for the year ended 2015 was 0.89 times compared with 0.43 times in 2014.

In some cases, while a takeover may seem likely, the reality may be different.

“On paper, a sale may seem possible, but when you look at the numbers it becomes unlikely,” a market watcher says. He was referring to Perisai Petroleum Teknologi Bhd.

For its financial year ended December 2015, Perisai suffered a net loss of RM706.32 million from RM214.78 million in revenue.

As at end-December last year, Perisai had cash and bank balances of RM34 million, down from RM94.11 million a year ago.

Perisai’s long term-debt commitments for 2015 were RM824.29 million while its short-term borrowings stood at RM517.20 million. While long-term debt commitments have come down from RM1.02 billion, short-term borrowings increased substantially from RM135.09 million as at end-2014.

It is worth noting that Perisai’s largest shareholder, Ezra Holdings Ltd, which has 23.59% equity interest, paid a premium late last year to acquire a 12.13% stake in Perisai from Emas Offshore Ltd, in which it has a 75% stake.

Ezra forked out US$56 million, which is more than a 500% premium to the market value of the stake, which was pegged at US$11 million. The huge mark-up was based on the cost of Emas’ investment at inception and to enable Emas to settle debts.

Perisai ended trading last Thursday at 26.5 sen. Its net assets per share as at end last year was 56 sen.

One company said to have ceased its oil and gas operations is Puncak Niaga Holdings Bhd’s GOM Resources Sdn Bhd, but this remains unverified.

GOM owns a derrick lay barge and completed the laying of a 280km pipeline from the Terengganu gas terminal to pipeline tie-in skids for Petronas Carigali Sdn Bhd.

“Puncak may sell the asset and exit the business,” a market watcher says.

For its year ended December 2015, Puncak posted a loss before tax of RM152.4 million, compared with a loss before tax of RM8.9 million recorded in the preceding year’s corresponding financial year to date, representing a negative variance of RM143.5million.

Puncak says in its notes, “The higher loss before tax reported in the current financial year to date was mainly due to lower revenue in the oil and gas segment, impairment loss of goodwill and assets, coupled with higher operating costs from the construction segment.”

Last Thursday Puncak closed at RM1.27, giving it a market capitalisation of RM568 million.

Puncak’s controlling shareholder, Tan Sri Rozali Ismail who has a 39.66% stake, had previously indicated that the company would venture into plantations.

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