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Another round of O&G impairment seen in 4Q18

Pic Source: The Edge

Investors looking to enter the oil and gas (O&G) sector may want to wait until yet another round of asset impairments in the upcoming releases of companies’ performance for the fourth quarter of 2018 (4Q18).

“There may be some impairments, but not as bad as two years ago,” said AmInvestment Bank analyst Alex Goh.

But seeing how O&G shares are so sensitive to negative surprises right now, it could put further pressure on share prices that are already at record lows.

This would involve mainly vessel operators, whose ships are ageing and charter rates have little chance to rebound from their current lows anytime soon, according to Maybank IB analyst Liaw Thong Jung.

Candidates also include those who excluded non-core assets during the massive impairment rounds in 2016 and 2017, such as the oilfield services of rig operator Velesto Energy Bhd.

Will this be the last big round?

“I would say that from 4Q18 onwards, there will be very minimum impairment because there have not been any new asset purchases,” said Liaw. “Everyone has been busy cleaning up [their balance sheet].”

Putting the house in order

Offshore support vessel owners like Perdana Petroleum Bhd and Alam Maritim Resources Bhd have turned to Bank Negara Malaysia’s corporate debt restructuring committee to obtain temporary relief from creditors.

A positive outcome can be expected, said Liaw. Perdana, for example, has posted two profitable quarters as it operates the business as usual.

Nonetheless, recovery is not yet on the horizon. “For them to rerate, we should see an increase in day rates from the bottom,” he said. “We could see rates improve only in 2020, 2021,” Liaw added.

AmInvestment’s Goh concurred. “Rates are likely to remain flat this year,” he said. “If you are not willing to [bid] at current rates, your clients may appoint others; there is still a huge excess in supply.”

Even companies that have won contracts in the last few months like Barakah Offshore Petroleum Bhd and Alam Maritim are finding it hard to pick themselves up as finance costs have put a huge dent in otherwise better prospects.

“If you do not [address the balance sheet], the situation will persist,” said Liaw.

Persistent oversupply and high gearing issues combined have played out long enough to divide companies between those with good and bad balance sheet.

Now they are at the stage where survivors look for growth with the latter scrambling to reduce gearing or risk getting weeded out by market forces.

The first casualty is PN17 company Perisai Petroleum Teknologi Bhd, which has already been issued a notice of delisting from Bursa Malaysia.

Others are buying time. Last week, Daya Materials Bhd announced it was issuing 534 million new shares, representing around 26% of its current share base, to a lender at 2.5 sen apiece to pare debts.

The counter — also in PN17 status — is trading at one sen, as with another PN17 firm Sumatec Resources Bhd. The regularisation plans of all these PN17 companies are due to be submitted in the first half of this year.

Cheap counters waiting for next cycle

Those who have cleaned up their balance sheet can fully benefit from the next upcycle, such as Velesto, Sapura Energy Bhd and Petroliam Nasional Bhd’s indirect subsidiary Malaysia Marine and Heavy Engineering Holdings Bhd (MHB).

On top of Sapura’s RM16 billion order book and the improving prospects in local fabrication activities — a core MHB business — both companies have been shortlisted as long-term contractors for Saudi Aramco.

“[Sapura] has done everything accordingly and quickly,” said Liaw, referring to the steps it has taken to pare debts, such as the crucial RM4 billion cash call — of which subscription rate is to be announced today — and the sale of 50% in its energy unit which raised RM3 billion cash and other related funds.

“We think MHB has already bottomed,” added Liaw. “They just need one strong, big job to revive the interest [of investors]. And they are cash-rich at 37 sen per share, near 54% of its current share price,” he added.

Alongside Liaw’s “buy” call on Sapura at 55 sen, the firm had 11 “buy”, three “hold” and no “sell” calls since December with target prices between 30 sen and 60 sen. MHB, on the other hand, has three “buy” calls, seven “hold” calls and one “sell” call.

Of course, there are top picks in the sector such as Dialog Group Bhd, Yinson Holdings Bhd and Serba Dinamik Holdings Bhd, which still have untapped value in the long run. But the beat-up shares in companies who have readied themselves for the next cycle stand to gain the most.

Notwithstanding the supply-demand mechanics and the geopolitical uncertainties, no oil producers, including US shale companies, are comfortable with oil price below US$50 (RM205.50) right now, which supports the consensus projection of US$60-US$70 per barrel average moving forward.

In hindsight, the 2015 downturn was the longest and the lowest in decades. This could mean a greater rebound where fewer companies will be left standing to enjoy the cake when it is ready.

Source: The Edge