KUCHING: 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.
“While painful, we believe this is a necessary move for the industry as the previous oil price boom has created a huge oversupply of expensive vessels and rigs in the market,” HLIB Research opined.
It also believed that the oversupply situation would not go off anytime soon as long as no asset players are scrapping their older vessels.
“Warm/cold-stacking vessels and rigs are only temporary solutions for the industry as more vessels would come back online if demand increases significantly, creating another cycle of boom and bust for the asset-heavy sector.
“We opine that the industry needs a ‘real’ decline in asset supply to bring the DCR back to the previous levels,” it commented.
Meanwhile, on whether Malaysian O&G players can weather the current volatility in the market, HLIB Research observed that overall, local O&G companies still look rather healthy from the cash flow perspective with operating cash flow/sales more than 20 per cent on average while operating cash flow/interest remains healthy at more than three-times.
On the business front, the research house believe that Dayang Enterprise Holdings Bhd (Dayang) is the most well-balanced company with services (hook-up and commission) and asset component (OSV from Perdana Petroleum Bhd).
“Given its strong cash generation, we believe the company deserves a second look by long term shareholders (more than a year horizon) and we suggest a ‘buy’ on weakness approach on the stock given the anticipation of earnings headwinds in the near term,” it said.
On oil prices, the research house said, it is currently a volatile period for crude oil whereby prices plunged to a low of US$26 per barrel (bbl) and have rebounded to more than US$40 per bbl within the span of four months despite largely unchanged oil market fundamentals.
“Oil surplus of close to two million bbls per day is still anticipated for 2016. Recent surge in oil prices seemed to have priced in potential production control to be agreed upon between Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC countries in the Doha meeting on April 17, 2016, of which its outcome would be the key driver of oil price movements going ahead,” it said.
In the near term, HLIB Research maintained its bearish view for 2016 on oil prices as an oversupply is still expected to persist while oil inventory is still at an all-time high despite recent inventory draw.
It expected oil prices to remain at US$30 to US$35 per bbl while in 2017, its target for Brent is at US$45 to US$50 per bbl.
“Premature recovery in the oil prices, in our opinion, would stifle the long term recovery of the industry.
“The market is able to reverse back to its oversupplied level swiftly from restarts of US shale drilling,” it opined.
Overall, HLIB Research said the O&G sector remains primarily as a trading sector for shorter-term traders due to high volatility in share prices and oil prices.
“With crude oil prices expected to see-saw for the most of the time in the year, we believe O&G is still a trading-oriented market suitable for short-term traders to capitalise on the oil price movement,” it said, noting that it maintained its ‘neutral’ view on the sector.