More impairments needed for significant shift in O&G sector
KUALA LUMPUR: Analysts believe that asset impairments made by Malaysia’s oil and gas (O&G) players are not sufficient as charter rates have plunged 30 to 40 per cent with some assets being completely unutilised.
The research arm of Hong Leong Investment Bank Bhd (HLIB Research) highlighted this in a recent research and pointed out that asset players need to impair their assets to a greater extent to bring down their overall cost structure through lesser depreciation.
“Most of the players have impaired not more than 20 per cent of their assets (except for Perisai Petroleum Teknologi Bhd possibly due to higher cash flow risk) which is a small amount relative to 30 to 40 per cent drop in daily charter rate (DCR).
“DCR rates are not expected to recover anytime soon or ever to the previous high levels as cost rebasing may form as the new normal in the industry. Supply of offshore support vessel (OSV) and Jack up assets are still more than needed in the region and there are no signs of tightening in supply whereby there are more asset deliveries delayed in the shipyard,” it explained.
“Under the current low activity and low rate environment, we believe costs of asset players need to be rebased through lowering their asset depreciation expenses by impairing their asset values (potentially by another 20 per cent) to improve their profitability.
“Cash expenses of asset players are already low (less than 40 per cent of total expenses) relative to its non-cash costs (which is depreciation), rendering cash cost savings alone (through warm stacking or cold stacking) insufficient for asset players to remain P&L positive during these times.
Most of the players have impaired not more than 20 per cent of their assets (except for Perisai Petroleum Teknologi Bhd possibly due to higher cash flow risk) which is a small amount relative to 30 to 40 per cent drop in daily charter rate. HLIB Research