KUALA LUMPUR: MALAYSIA’S oil and gas (O&G) firms are expected to face fiercer competition in the long term even as they improve on cost efficiency to remain resilient, said analysts.
Kenanga Investment Bank Bhd said O&G service players were facing limited tenders while having to deal with tighter cash flows, unutilised vessels and ballooning debt obligations.
“While we believe the industry is undergoing restructuring, which allows the fittest to survive, we observe that some players have collaborated to tender for jobs far beyond their core competence.
“Thus, we expect more bidders for the very same job, with some quoting significant lower prices in order to bag the contract. Oil majors are also more inclined to dish out contracts on a lump sum basis instead of on a per vessel basis, pushing the cost management obligation towards services players,” it said in a research note recently.
MIDF Research analyst Aaron Tan said earnings for local O&G service providers would remain under pressure from low activity levels, high gearing level, high overhead expenses and impairment charges.
“For the second quarter earnings season, Petroliam Nasional Bhd (Petronas) group of companies posted commendable earnings, which were within expectations as these were mainly downstream and infrastructure companies.
“As for offshore-related companies, earnings were hampered by lower profit margins from lacklustre activity levels. Contract flows for the remaining part of the year remain extreme and we are expecting Brent crude to average US$45 (RM184) per barrel for the remaining part of the year.
“We are negative on the upstream segment but positive on the downstream segment,” he told Business Times recently.
Public Investment Bank Bhd said the O&G sector remained the major underperformer this current quarter, with notable misses also coming in the construction sector.
“We expect fiercer competition among services players arising from price slashing for cash flow, and collaboration with other players for new types of jobs that will potentially reduce profitability.
“Oil prices are likely to be capped at below US$55 per barrel due to overbuilding of oil inventories and revival of rigs count.
“The Organisation of the Petroleum Exporting Countries meeting in Algiers later this month could be a potential game changer, but we foresee no favourable outcome on production rationalisation in view of the ongoing tussle for market share,” it said in its research note to investors.
As a whole, the O&G industry is set for an underwhelming performance as the second-quarter report cards remain unexciting, with half the results falling below expectations.
“This is largely attributable to lower-than-expected pick-up in O&G offshore activities post-monsoon season coupled with weaker margins. In the second quarter of this year, offshore support vessel players and drillers managed to narrow their aggregate losses from the previous quarter as a result of better vessel utilisation due to seasonality.
“However, we gather that the daily charter rates have not bottomed given that the price slashing has intensified, arising from more desperate players trying to recoup cash to service their loan repayment and operating cost,” it added.