KUALA LUMPUR: The oil and gas blight appears to have bottomed out and it is time for crude prices to gradually trend upward through to next year, say industry captains and analysts.
The prospect comes partly amid a fresh hope of a new wave of mergers and acquisitions (M&As) and consolidation in the sector, they said.
Despite top global oil producers’ failure to reach an agreement on a production freeze at a meeting in Doha on Sunday, oil prices have seemed to maintain at more than US$40 (RM156) a barrel after a momentary dip.
The commodity tanked on Monday after the world’s largest producer Saudi Arabia walked away from the talks due to a boycott by rival Iran. Many had hoped for an agreement that could help ease a huge surplus in global oil supplies.
Response to sectoral M&As and consolidations has been lukewarm as players view that they have the resilience to ride out the storm for as long as it takes.
However, things are expected to change sooner rather than later.
According to MIDF Research, M&As must be value-accretive for the process to take place, hence the lukewarm take-ups.
“M&As require willing buyers and willing sellers and both parties have to agree on pricing. The issue now is that buyers obviously want to buy at a lower price and sellers want to sell at a higher price.
“M&As normally take place easily when one party is in financial distress. If the merging and acquiring companies cannot provide value creation, then it could potentially be value-destructive,” it said.
Malaysia International Shipping Corp Bhd (MISC) is one player looking for such acquisition.
Its president and group chief executive officer Yee Yang Chien disclosed that the group was eyeing opportunities from “distressed assets” that it could leverage.
“In the FPSO (floating, production, storage and offloading) market, we believe the number of new tenders and contracts may be limited, but there are also going to be assets for sale... those that have long-term contracts but their owners have to sell because they are in distress or the owners need to raise money for other purposes.
“So, instead of going into fresh greenfield bids, we are also looking at buying existing assets which are already in production and with a time-charter contract. Therefore, we can go through a specific asset acquisition which has no construction risks.”
Yee said MISC would just have to make sure that the asset was good and the counter-party was great.
“Low oil prices will drag out the distress period and as companies get more distressed, we believe more assets will come out to the market in the next one or two years.
“There’s no need for us to rush,” he said recently.
Azmi Ahmad, managing director and chief executive officer of Alam Maritim Resources Bhd, said the stumbling block in M&As among O&G players had always been valuation issues, especially those involving merger with public-listed companies.
“The oil and gas industry is quite capital-intensive in nature and local or international players would normally have different expectations in term of value of their respective businesses. The sentiment may change if the current condition affecting the players continues.
“If the oil price hits US$20 per barrel, it should be natural for O&G players to join forces, with a view to controlling their respective market segments, reducing operating costs and addressing margin compression.”
M&A activities would help create bigger entities for competitive advantage and business sustainability in the long run, he told Business Times in an email interview recently.
“Some oil majors are talking about average production cost of US$25 per barrel (for offshore production facilities), depending on areas of operations such as shallow or moderate water-depth environment, and efficiency of their operations. Marginally lower average cost of operations should be expected for onshore operations,” said Azmi.
He added that the impact would be quite damaging to the local O&G industry with small-sized players not being able to sustain their operations due to lack of activities, ensuing cash-flow problems and eventually forcing them to close down.
“Our local players have to be more competitive to grab scarce contracts and, perhaps, explore opportunities to expand their market beyond Malaysia in order to stay afloat and remain sustainable. Still-depressed E&P (exploration and production) spending by oil majors has prompted us to maintain our pessimistic view on the offshore-focused oil services sector.
“We hope the current trend of improving oil price is here to stay and the momentum of recovery to continue going forward. If the trend is going down south then we should expect numerous restructuring activities involving credit facilities and business combinations among players to emerge leaner and stronger.”
Azmi, however, added that the make or break factors were still in operational efficiency and the ability to conserve cash flow.
On Thursday, the United States West Texas Intermediate crude futures slid 2.3 per cent to settle at US$43.18 a barrel, while London’s Brent crude futures was down 2.8 per cent to close at US$44.53 a barrel.