No financing leeway even for Malaysia’s oil and gas players

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Malaysian banks are cutting exposure to oil and gas (O&G)-based loans. While the banks save themselves, O&G companies are struggling harder to stay afloat.

By Joelyn Chan

The Malaysian oil and gas industry has been suffering from prolonged low oil prices. During the past ten years, crude oil prices fell from above US$130 per barrel to an all-time low of US$26 per barrel. The unpredictable and changing global environment cause oil prices to fluctuate severely. Recently, members of the Organisation of Petroleum Exporting Countries (OPEC) have been complying with the agreed production levels. The gradual reduction in oil inventories will help alleviate the oversupply of oil. But, prices will unlikely return to its past average of at least US$80 per barrel soon.

Sources: Petronas Activity Outlook 2017- 2019, Petronas Activity Outlook 2018-2020

Meanwhile, The Edge’s December 2017 weekly report noted that banks have been more cautious in their lending to the O&G sector in recent years. It quoted O&G players like Deleum Bhd and Uzma Bhd. Given the current global dynamics, it may be reasonable for the banks to act in its own interest. However, their decision to not lend capital needed may drag Malaysian Oil and Gas Services and Equipment (OGSE) industry further away from its long-term vision of being able to compete with the best in the world across multiple categories in terms of cost and quality.

Falling revenue even for Malaysia’s national oil company, Petronas

Petroliam Nasional Berhad (Petronas)’s performance may be indicative of the industry performance, as it has contributed greatly to the industry over the past 40 years. In its annual report 2016, revenue decreased by 17% to RM204.9 billion (US$50.2 billion). Revenue has been falling since its financial year 2014. Although profits still increased, it is due to factors such as lower operating expenditure and net impairment on assets. The industry has yet to regain its stable growth. At the preliminary stage of analysis, substandard performances of Petronas and other oil players have probably eroded the bankers’ appetite for O&G companies.

Petronas issued its inaugural Petronas Activity Outlook report in 2017. These forward-looking reports could help to reassure the market stakeholders. In Petronas Activity Outlook 2018 – 2020, vice president of group procurement Samsudin Miskon said, “Information transparency on market activity outlook is essential and we believe this will help rebalance market dynamics and support industries like investments and financing – crucial components in promoting a thriving oil and gas ecosystem.” These reports improve the visibility of Petronas’ activities and highlight growth potentials.

Financing woes of O&G players

“The Malaysian debt market is dead … asset cover here is 2.5 to 3 times while in Europe, it is 0.8 times,” said Vaidyanthan Nateshan, CEO of De Raj Group AG. Cash flow problems in some upstream service providers have resulted in deteriorating loans ratio performance. According to the Association of Banks (ABM), risks to the banking system remained limited as exposures to the O&G sector accounted for about 6.5% of total exposures. The ABM works closely with Malaysia’s regulators and represents all the commercial banks that currently operate in Malaysia.

Source: The Association of Banks (ABM)

ABM’s press release also states that “our member banks which comprise the 27 commercial banks in Malaysia, have remained supportive and will continue to provide access to financing for viable businesses including the oil & gas (O&G) sector.” However, this is not the first instance where ABM has stepped up to address concerns. In October 2017, ABM also issued a statement to refute difficulties in obtaining house loans. Now, it is up to the public to decide if they believe ABM’s statements or not.

Furthermore, with World Bank Group’s announcement of its intention to stop financing upstream oil and gas projects after 2019, banks all around the world may hesitate longer before lending to O&G companies. As compared to other types of loans, financial repayments for O&G projects spread over a longer horizon. Banks bear huge risks when they loan out a sizable sum of money to O&G players.

Companies like De Raj Group AG may just end up listing out of Malaysia, so as to get its needed funding for sustainable growth. Economic Planning Unit (EPU) in the Prime Minister’s Department, the Malaysia Petroleum Resources Corporation (MPRC) and Petronas are already trying to help local oil and gas companies meet the banks’ requirements. Though there are obstacles to overcome, the funds secured would benefit the distressed parties.

O&G companies are not performing like how they used to be. Malaysia has no direct or full power over OPEC, and thus, the industry remains susceptible to changes in oil prices. It is not the end of the world for oil and gas companies, but they are in for an extended struggle towards long-term profitability and sustainability.