Will there be lights at the end of this dark tunnel of oil & gas contractors in Malaysia (masih adakah harapan untuk contractor oil & gas bangun?)
Before I conclude the oil & gas (O&G) sector recovery hopes for contractors in Malaysia, lets take look on some historical data and trend of oil & gas price few years back. 2 years ago, I have posted in my Facebook on the weak hope that the business will recover.
According to the crude oil price chart prepared by macrotrends (https://www.macrotrends.net/1369/crude-oil-price-history-chart), the price of crude oil as of Nov 2019 is $57/barrel. Within this 3 years, the price was ranging from $52-$72 / barrel. This is the same price as year 2005. Looking at the trend and what is currently happening in the middle east, we could expect the price would maintain for next few years. The main different of 2019 and 2005 is that the price in 2005 is keep increase while the current price still playing within $52-$72 /barrel.
Even though the price in 2005 and 2019 is the same, contractors in Malaysia would still able to make a good profit thus allowing them to grow and provide better service, process and equipment. Medium & large company was able to survive and small company continue growing in the market. There is enough pieces of cake for everyone.
When the market was hit badly end of 2014 and it hit a low bottom crude oil price of $36 / barrel early 2016, the O&G operators have taken drastic actions to reduce the impact. There was a lot of projects held, downsizing/reorganising the business and reducing the headcount thus it has change overall landscape of the O&G business. Many of the current contracts going for re-negotiation in 2016. For a new contract, contractors has no choice than to push their price down below to ensure the company would sustain in the business.
There was a lot of assets laying down and released/sold. For those who still want to survive in the market, the price has gone down to the operating cost just to keep the asset moving. Not to forget that some of the company was windup.
Anyhow, this opportunity was taken by some vendors or small company to get into the market. With very low headcount, cost and less internal process/bureaucracy, these company able to give irresistible offer to the client. For a large company, it was a big upset. With a complicated & thorough compliance to internal process which required many headcount and huge numbers of assets, these large company was struggling.
When we saw slightly hope that the crude oil price picking up in 2017, the Malaysian large contractor was still operating with the 2014 contract price while vendors and small company that provide service for this large company have already increase their price. I remember in 2018, a lot of vendor have turned to the middle east and told me that over there had better market. But in Malaysia, we react very slow in growing but very fast in shrinking.
Doing a business is always, always, about how much return could we get from the amount of money we invest. According to The Star (https://www.thestar.com.my/business/business-news/2019/03/08/petronas-profit-rises-22pc-to-rm55-3bil-in-fy18) PETRONAS was making RM55.3bil profit after tax in 2018 while Royal Dutch Shell making $21bil in 2018. To recall the cruder oil price of 2018 was about $60–$70 / barrel, most of the contractor contract price was still close as 2015 prices. If the contractors would increase the bidding price, then it would loose to the smaller player or lower bidder and would not have any revenue. While the O&G operator keep pushing the contractors for a similar 2016 price ($35–45), the operators are benefiting on the current $50-$70 /barrel price. Operators might take this opportunity to gain more profit with less cost from projects.
The affect of this was seen recently.
- Sapura Energy Q4 of 2018 recorded a net profit of RM500.42 mil (https://www.thestar.com.my/business/business-news/2019/03/25/sapura-energy-returns-to-the-black-net-profit-at-rm500-42mil-in-4q1) but it was all thanks to selling of 50% stake of Sapura Exploration & Production (https://www.thestar.com.my/business/business-news/2018/11/30/sapura-to-sell-stake-in-drilling-division) ( https://www.thestar.com.my/business/business-news/2019/01/29/sapura-energy-gets-green-light-for-omv-deal)
- McDermott was losing $1.9bil in 2019 (https://www.chron.com/business/energy/article/McDermott-posts-1-9-billion-loss-amid-stock-14808732.php)
- Subsea 7 and Saipem plan to emerge (https://www.offshoreenergytoday.com/saipem-subsea-7-merger-would-create-the-fourth-largest-oilfield-service-firm-rystad-says/)
With some of the contractors went so low on the price and removing some of essential cost such as depreciation, the glory days for O&G contractors might not be possible anymore. Some of them are just going for a good revenue and EBITDA, while scarifying the PATAMI. The light of the end of the tunnel will surely be different from the one we used to lived. The landscape has changed. Like what I heard, O&G is not the sexiest industry anymore.
I hoping for the best and miracle happen in the future.