New wave of consolidation on the O&G horizon
KUCHING: In the near to medium term, analysts believe that more local oil & gas (O&G) will be considering or might be in the midst of consolidating their businesses.
MIDF Amanah Investment Bank Bhd’s research arm ( MIDF Research) in a sector update report, highlighted that stable global crude oil price has provided visibility for O&G service providers to embark on the merger and acquisition (M&A) trail in anticipation of industry rebound.
“In the near to medium term, we believe that more local oil and gas service providers will be considering and will even be in the midst of consolidating their businesses.
“Vertical integration would be the most likely possibility as different companies involved in different areas of the value chain will look into possible
In the near to medium term, we believe that more local oil and gas service providers will be considering and will even be in the midst of consolidating their businesses.
business synergies and business collaborations,” it opined.
It further pointed out that for the past three years since the decline in crude oil prices and slowdown in offshore activity levels, local O&G service providers have been rather successful in right-sizing their workforce and rationalising their operating expenses.
Of note, it has been three years since global crude oil prices saw a significant decline of more than 50 per cent in six months and subsequently declining to a low of US$27 per barrel early 2016.
“Although there were persistent calls for consolidation amongst roughly 3,600 Petroliam Nasional Bhd ( Petronas) license holders across the services industry for many years, it is not until the second quarter of 2015 (2Q15) that Dayang Enterprise Bhd ( Dayang) officially increased its stake in Perdana Petroleum Bhd which triggered a mandatory general offer ( MGO),” MIDF Research noted.
More recently, UMW Oil and Gas, Icon Offshore and Orkim Sdn Bhd staged a merger that would create an integrated service provider consisting a drilling rig owner/operator, offshore support vessel owner/operator and clean petroleum product marine transportation vesselowner/ operator.
The research team also noted that the creation of SapuraKencana Petroleum Bhd in 2QFY12 paved the way for the country’s largest listed integrated service provider with businesses across the globe.
“We are hopeful that the new merged entity between UMW Oil & Gas, Icon Offshore and Orkim Sdn Bhd will mimick the success of SapuraKencana in creating a larger global footprint in the oil and gas services realm,” it said.
“Besides the operat ional synergies which can be achieved in a merger, we are of the opinion that this strategic merger will benefit the merged entity in the future as it will be able to offer more integrated solutions to its clients,” MIDF Research said.
“The next step now is to form larger business entities to bid for larger integrated jobs regionally and globally,” it added.
MIDF Research also pointed out that after three years of subdued activities, major international O& G players are now stepping up their capital expenditure (capex), in view of the recovering sector outlook and global crude oil price.
It explained, “According to consensus data gathered, capital expenditure by global integrated exploration and production oil majors is expected to increase by 4.3 per cent year- on-year (y- o-y) in 2017 while North American independent exploration and production companies are expected to increase their capex by more than a third this year.
“Increase in capex indicates bullishness on the sector and on global crude oil prices. Service providers are also seen positioning themselves in preparation for an increase in demand for offshore services and to also participate in prospective job tenders.”
Regionally, it noted that demand for offshore support vessels (OSV) and drilling assets remain strongest in Indonesia as the government continues to push for developmental drilling in 2017.
Meanwhile, it believed that the current round of consolidation would be between O&G service providers companies with common major shareholders keen to rationalise their exposure in oil and gas sector while trying to increase their returns on investment.
“In addit ion, companies which are more susceptible to consolidation are companies with in-demand proprietary technology and possess a stable of robust assets with moderate utilisation rates,” it added.
Overal l , MIDF Research opined that the creation of larger integrated O&G service providers capable of venturing into the global markets is a matter of national importance.
MIDF Research