Riding out the storm
Survival of O&G fabricators may depend on greater consolidation
CALLS for greater consolidation in Malaysia’s oil and gas (O&G) industry are definitely not new, as two consecutive top honchos of Petroliam Nasional Bhd (Petronas) have urged for mergers and takeovers in the industry to “ride out of the storm”.
Particularly referring to oil and gas fabricators, Petronas president and CEO Datuk Wan Zulkiflee Wan Ariffin said earlier this year that while there were eight such yards in Malaysia, Petronas’ requirements for the next few years would only be sufficient to cater to the optimum utilisation of two to three fabrication yards.
O&G fabricators are principally involved in the business of manufacturing and assembly of parts or structures for oil rigs or other related infrastructure.
“We are not in a position to help all eight because we simply do not have work to give.
“The requirements have scaled down due to the low oil price environment,” he said.
At present, there are eight domestic fabricators licensed with Petronas, out of which six are listed on Bursa Malaysia.
The listed fabricators are Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE), Sapura Energy Bhd, TH Heavy Engineering Bhd (THHE), Boustead Heavy Industries Corp Bhd (BHIC), KKB Engineering Bhd and Muhibbah Engineering (M) Bhd.
The two non-listed fabricators are Labuan Shipyard & Engineering Sdn Bhd and Brooke Dockyard and Engineering Works Corp.
In the past few years, global oil prices went on a free-fall, hitting as low as below US$30 per barrel compared to a high of US$102 per barrel in mid-2014.
The impact has been nasty on the industry as well as the O&G fabricators.
Speaking to StarBizWeek on the performance trend of the fabricators, RHB Research analyst Wan Mohd Zahidi Wan Zakwan says that the past few years have been difficult for the O&G fabricators.
“Of the major ones, Sapura Energy continues to do well. MMHE is a world class fabricator, however the industry downturn has affected its orderbook replenishment,” says Wan Mohd Zahidi.
Performance wise, it is not all gloom and doom for the fabricators.
Among the six listed fabricators, half of them registered positive earnings for financial year 2016, namely Sapura Energy, BHIC and Muhibbah.
However, the rest three fell into the red. Amid the mixed performance of the fabri- cators, THHE has suffered the most.
THHE in the red
A smallish entity with a market capitalisation of approximately RM84mil, the Main Market-listed THHE slipped into Practice Note 17 (PN17) status on April 29, 2017, after the company’s independent auditors expressed a disclaimer opinion on its accounts for the financial year ended Dec 31, 2016 (FY16). THHE’s market capitalisation stood at its peak of RM1.1bil in February 2014, when its share price hit RM1.03
THHE is an associate company of Lembaga Tabung Haji, in which the latter is the single largest shareholder with a 29.81% stake.
THHE took a greater hit in FY16 as its net loss widened by seven-fold to RM365.84mil, in contrast to the RM45.34mil net loss recorded a year earlier.
The O&G fabricator’s top line also plunged by 82.3% to RM17.78mil in FY16, on a yearon-year comparison.
“As at December 31 last year, the current liabilities of the group have exceeded its current assets by RM733.06mil.
“The current liabilities of the group as at December 31, 2016 arose mainly from borrowings, and trade and other payables amounting to RM319.41mil and RM542.20mil respectively,” stated THHE in an earlier filing with the Bursa Securities.
As at end-2016, THHE said the group did not have any readily available sources of fund for repayment of its current borrowings.
Share price wise, THHE has been on a downtrend since mid-2016. Year-to-date, the share price has plunged by almost 53% to 7.5 sen as at closing of trading yesterday.
THHE’s current share price is close to an all-time low of 6.5 sen.
In addition to the debilitating low oil price environment, THHE took a further hit after Petronas Carigali Sdn Bhd barred THHE’s 70%-owned THHE Fabricators Sdn Bhd from participating in its future tenders for two years. Petronas Carigali cited “performance-related issues” in KNPG-B Topside PH II, Kinabalu Non-Associated Gas (NAG) development project, for THHE’s exclusion.
The offshore facilities fabricator has also received numerous winding-up petitions following repayment delays.
However, THHE has managed to obtain a restraining order from the Kuala Lumpur High Court to restrain all further proceedings with regard to the winding-up petitions.
An analyst tells StarBizWeek that THHE’s “unattractive” balance sheet and track record could hamper the fabricator in bidding for new projects, moving forward.
However, THHE’s attempt to return to the black could be aided by the RM738.9mil contract won earlier this year.
THHE Destini Sdn Bhd, a joint venture between THHE and Destini Bhd, has been awarded a contract worth RM738.90mil from the Malaysian government to build three offshore patrol vessels complete with fitting and accessories for the Malaysian Maritime Enforcement Agency.
The 42-month contract is expected to contribute positively to the earnings and net assets per share of THHE for the period of FY17-20.
This contract could be the much-needed “lifeline” for THHE.
Moving forward, prospects of the O&G fabricators depend on the area of the value chain fabricators operate in, according to PublicInvest Research analyst Mabel Tan.
“Rigs and also deepwater-related type fabrication jobs such as vessel fabricators may find their activities remaining sluggish.
“Fabricators of brownfield-related jobs, however should and will experience more robust work orders such as repair and maintenance of O&G structures, topside, jackets, drydocking, refurbishment and conversion of O&G assets.
“Fabricators that have contracts in Pengerang Integrated Petroleum Complex (PIPC) and Rapid, where Petronas has committed US$27bil of capital expenditure for its development, could also benefit,” she says.
Wan Mohd Zahidi also indicates an improvement in project opportunities for the O&G fabricators.
“With the higher oil price and price stabilisation which follows it naturally, I think there should be more projects being approved to the development stage soon.
“Fabricators should benefit from more development projects.
“Having said that, oil majors would not spend capital expenditure willy nilly and every project would be scrutinised to the most minute detail. Sapura Energy and MMHE to a certain extent would benefit from higher development capex spending. Sapura Energy’s current orderbook should enable it to keep busy while MMHE has a strong balance sheet to take on big projects,” he says.
While the oil price is improving, it is nowhere close to the “normal” of 2014.
Hence, survival of the O&G fabricators in the medium and long-term could depend on greater consolidation.
That said, industry-wide consolidation, especially among the fabricators, would only bear the best results if it is done with a synergistic purpose in mind.