Some oil companies that piled on too much debt won’t make it in today’s world of $40-$50 oil.
THE near-demise of Singapore-listed oilfield services company Swiber Holdings Ltd has cast a large shadow on its Malaysian peers who are facing similar mounting debts, a lack of new tenders and a depleting cash pile.
With oil prices still in a bear market for the second year running, smaller offshore services firms may continue to underperform as high debt obligations will continue to eat up existing cash reserves, say analysts.
Swiber had initially filed for liquidation on July 29 but had subsequently sought judicial management in an attempt to restructure the company’s existing businesses. The firm, which has 51 vessels in its fleet, has a prominent presence in Southeast Asian waters in a variety of jobs.
The effects of the two-year slump in oil prices were clearly seen in Swiber. Its capitalisation had fallen by 90% from its 2013 peak prior to the stock’s suspension last week.
Over the same period, its cash pile has been depleted by a series of debt repayments, which is a recurring theme for companies in the industry that tend to be highly leveraged.
The company’s predicament has put the spotlight on its Malaysian peers. Alam Maritim Resources Bhd, which has two joint ventures with Swiber, will now have to proceed without its partner.
As the joint ventures are vital cash generators for Alam, it is unlikely that the firm will dissolve them following Swiber’s exit. But it is now faced with the choice of buying out Swiber’s stake or finding a new partner, said Maybank IB Research in a note.
“The two JVs, which comprise a pipelay barge and a ship operator, are doing fine. The ventures could generate a combined net profit of RM8-RM10mil, of which Alam’s share is RM4-5mil,” said the research house, which nonetheless remained bearish on Alam with a ‘sell’ call and a target price of just 11 sen.
At the moment, the need to preserve cash flow continuity is of utmost importance in order to service existing debts. According to AllianceDBS Research, domestic contract flow in the oil and gas industry hit its lowest point in nearly four years during the second half of this year (2Q16).
“With utilisation rates at and charter rates at multi-year lows, there are few immediate bullish catalysts in the industry at present. To give just one example, talks of the possible mergers or consolidation in the oil and gas industry have largely fizzled out as there is no extra cash to be spent.” explains one oil and gas sector analyst.
To illustrate the debt load situation, a check on Bloomberg data reveals at least seven companies listed on Bursa Malaysia whose net debts currently exceed their entire market capitalisations.
The companies include SapuraKencana Petroleum Bhd (SapKen), Bumi Armada Bhd, Wah Seong Corp Bhd, and Icon Offshore Bhd, among others.
Meanwhile, at least twelve oil and gas companies have net debt-to-earnings ratios of at least three times, which far exceeds the benchmark FBM KLCI’s ratio of 1.17 times currently.
This financial metric is typically used to measure a company’s ability to service existing debts relative to its earnings performance.
UMW Oil and Gas Corp and Barakah Offshore Petroleum Bhd are among the highest with ratios of 13.71 times and 12.52 times respectively, according to Bloomberg data.
While large cap companies such as SapKen has successfully refinanced a large part of their debt load, the oil and gas industry as a whole remains highly leveraged even now.
Some 20% of Bursa Malaysia listed corporates showed below average debt coverage levels while another 8% were aggressively leveraged, said RAM Ratings in a commentary on Aug 2.
Oil and gas companies are among those with weaker credit indicators and will be most vulnerable to economic stress, it added.
The current abundance of crude oil supply and inventory means that the occasional rallies in the market were short-lived this year.
After hitting a year-to-date high of US$52 per barrel in early June, Brent crude prices have declined by 15% in a month to US$44 on Aug 4.
Supply from the Organization of the Petroleum Exporting Countries (Opec) also rose to a record high of 33.41 million barrels per Aday (bps) in July, which could further dampen any upside potential in the commodity’s price, Reuters reported. – by Afiq Isa The Star/Asian News Network
Alam Maritim on Swiber impact
Azmi says contribution from JV with company not substantial
PETALING JAYA: Alam Maritim Resources Bhd will not feel the heat from financial troubles of its partner, the Singapore-listed Swiber Holdings Ltd.
In fact, Alam Maritim is considering taking over the stake of the troubled-oil and gas (O&G) firm in a project that the companies are working on.
“There is only one project directly contracted with Swiber which is almost fully-completed namely engineering, procurement, construction, installation, commissioning of SK316 development job worth US$76mil,” Alam Maritim group managing director and group chief executive officer Datuk Azmi Ahmad told StarBiz.
The SK316 project is the development of a huge gas field located offshore Sarawak.
The other option for Alam Maritim is to find a new partner to take over Swiber’s role.
He said Alam Maritim had two JV companies with Swiber,
The first is Alam Swiber Offshore (M) Sdn Bhd which is equally owned by Alam Maritim (M) Sdn Bhd and Swiber Offshore Construction.
The second is Alam Swiber DLB 1 (L) Inc, which is 51% owned by Alam Maritim (L) Inc and 49% by Swiber Engineering Ltd.
“The impact is minimal to us as the contribution from the Alam-Swiber JV is not substantial to the Alam Maritim group,” he said.
Swiber, the Singapore-based oilfield services firm was reported to be in talks with its creditors for a possible debt restructuring exercise.
The stock had slumped by nearly 90% since mid-2014, taking its market value to just S$50mil, while the company had flagged delays in orders, raising concerns and sparking demands for cash.
From just 10 vessels in 2006 when it was listed, Swiber had expanded to own and operate a fleet of 51 vessels with more than 2,700 employees across South-East Asia and other countries, according to its website.
Its shares surged after listing, pushing its valuation to S$1.5bil in late-2007, but the stock fell sharply in recent years.
Smaller firm Technics Oil & Gas Ltd was placed under judicial management this month, and analysts said other firms could face difficulties.
Energy and offshore marine companies in Singapore have bonds totalling nearly S$1.2bil due to mature over the next year-and-a-half, with S$615mil due over the next five months, according to IFR, a Thomson Reuters publication.
Alam Maritim, too is facing a challenging period.
On the O&G support services industry, Azmi said the impact of Brexit on the fragile global economy might slow down the recovery of the crude oil prices affecting overall demand and pushing out the rebalancing of the oil market.
“During this challenging period, we are aggressively and continuously embarking on various cost and asset optimisation initiatives to weather the storm,” he said.
Azmi added that Alam Maritim’s vessel utilisation rate was 56%.
“As at June, our order book stood at RM470mil, tender book at RM2.6bil,” he said.
Alam Maritim fell into the red with a net loss of RM19.2mil in the first quarter ended March 31 compared with a net profit of RM8.6mil a year ago.
Its revenue for the quarter shrank to RM48.6mil from RM73.7mil in the corresponding quarter last year.
According to Maybank Kim Eng, the low oil price has resulted in a swift response to cost reduction or renegotiating of contracts, cash conservation due to delayed projects and debts refinancing as well as strategic collaboration exercises.
“It also opened a window of opportunities to exploring mergers and acquisition options.
“About 69 North American exploration and production companies were declared bankrupt between January 2015 and April this year. “Uncertainties and differences in valuation expectations between buyers and sellers are the greatest hurdles. There is currently a buyer-seller mismatch in terms of expectations,” said Maybank Kim Eng in a June report on the sector.
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