Petronas’ MCMs won’t revive smaller players
Khairul Khalid 
Petronas has started announcing winners of its MCM contracts worth some RM6 bil

PETROLIAM Nasional Bhd (Petronas) began awarding its much-anticipated maintenance, construction and modification (MCM) contracts in the last few weeks, providing the market with much needed good news.

Dayang Enterprise Holdings Bhd, Carimin Petroleum Bhd, and Deleum Bhd have won Petronas MCM jobs which boost their order books.

Many others hope this will lead to a trickle-down effect and revitalise the oil and gas (O&G) sector.

However, the CEO of a local O&G company tells FocusM that Petronas’ MCM jobs will not mean much for the industry’s smaller players as their situation is already dire.

“Things are not getting better or worse. There is no effect [from the Petronas MCM awards]. The current Petronas contracting strategy (umbrella long-term) will result in many small players closing shop.

“Many have shut down and nothing is being done to prevent this. Companies continue to lay off workers.

“There are still too few jobs in the sector. There are plenty of repair and maintenance work, but rates have gone south,” says the industry player.

With an umbrella contract, Petronas conducts closed competitive bidding among selected contractors. It then picks the most technically capable and commercially attractive bidder that meets its scope of work and project requirements.

Three companies were awarded Petronas MCM jobs in quick succession in the past weeks.

On Sept 30, Miri-based Dayang, which provides marine support services, won the MCM services contract from Petronas Carigali Sdn Bhd.

On Oct 2, oil & gas engineering services company Carimin secured a MCM contract from Petronas for topside structural maintenance, workover preparation and facilities improvement.

On Oct 4, Deleum, which provides oil and gas-related support services and products, won the MCM contract under Package C (Offshore) - Peninsular Malaysia Gas.


Six packages

All contracts were for five years with an option to extend another year. Although no estimated value of contracts was provided, each award could be worth up to RM1 bil, with the combined value at RM6 bil.

The Petronas MCM tender was supposed to be awarded in the second quarter but was delayed.

More than 20 companies have bid for the Petronas MCM project, which was split into six packages. Additional announcements are expected in the coming weeks.

Market reactions to the Petronas contracts have been mixed. Of the three winners, only Deleum’s share price increased after announcement – up almost 5% as of Oct 11 to 96 sen.

However, Carimin and Dayang have fallen since their wins, down 2% and 6.5% respectively to 50 sen and 92.5 sen on Oct 11.

An analyst says reactions to the Petronas MCM awards are not entirely surprising as the market is still bearish.

Furthermore, the industry has yet to address some critical fundamental issues, especially the consolidation of smaller and medium O&G companies in the market.

“The market is still bearish. Sentiments are weak and investors are looking at the long haul. Local players still need to consolidate,” says the analyst.

Despite weak sentiments, the oil price spike and anticipation of the Petronas MCM jobs are seen as a potential boost to the industry that has been hurt by huge capital expenditure (capex) cutbacks and dwindling revenue streams.


Slashing capex, opex

As part of its ongoing restructuring plans, Petronas is slashing capex and operating expenditure (opex) by RM50 bil. The cuts started last year and will continue until 2019.

A sector report by Affin Hwang Capital says after a sluggish Q3, it expects contract flows to pick-up in Q4.

So far in Q3, contract values are down 87% quarter-on-quarter (qoq) to RM1 bil. There were only six contracts awarded compared to 17 in Q2.

Nevertheless, Affin Hwang expects Petronas’ MCM to stimulate the sector.

“We expect contract flows to pick up for the rest of this year, following the award of Petronas’ MCM contract.

“For sector exposure, our top large-cap pick is Petronas Chemicals Group Bhd, which we upgraded to a “buy” after its Q2 results.

“In the small/mid-cap space, we like Bumi Armada Bhd and Serba Dinamik Holdings Bhd. We have also lifted our earnings and target price on Dialog Group Bhd while maintaining our ‘hold’ call.

“Given our recent downgrade on a change in its fundamentals, Petra Energy Bhd falls out of our top small-cap picks.

“We maintain our ‘neutral’ call on the sector,” the research house says.

Boost for O&G  players

INVESTORS who bought Carimin Petroleum Bhd’s shares earlier this year are now laughing all the way to the bank.

Since mid-September, its share price surged as high as 90% to 55 sen on Sept 27 from 29 sen on Sept 13, boosted by the recent gains in oil prices.

Prior to this increase, the company’s share price looked as though it wasn’t going to break the 30-40 sen range, peaking at 38 sen in January.

The company went public in 2014 when oil prices were at an all-time low. Although its share price is far from the RM1.10 it closed at on its first day of trading, investors who took advantage of the cheap entry point have since made a tidy profit.

Mokhtar says Carimin is at a turning point

Carimin is on the cusp of a turnaround, says managing director Mokhtar Hashim. “I believe we are at a turning point,” he tells FocusM.

On Oct 2, the company announced winning a five-year contract to provide maintenance, construction and modification (MCM) services under Package C (offshore) from Petronas Carigali for an undisclosed sum.

The contract, which expires on Sept 19, 2022, comes with a years’ extension.

Several other oil and gas (O&G) players were similarly awarded Petronas’ MCM contracts in recent weeks.

Carimin, which specialises in hook-up and commissioning (HUC), and manpower supply, decided to diversify into civil construction to continue earnings during lean times.

The decision paid off as the segment brought in a revenue of RM9.02 mil in Q4 ended June 30, which is 32% of its total revenue of RM28.36 mil.

Of this, HUC jobs drew the bulk of revenue at RM15.23 mil (53.7%), while manpower services revenue stood at RM4.1 mil – a 61% drop from RM10.55 mil in the previous corresponding quarter.

The increase of 21.8% in the HUC segment (from RM12.5 mil previously) indicates a return to form in the O&G industry.

“HUC achieved a revenue increase of RM8.73 mil over the immediately preceding quarter as several contracts moved towards final documentation.

“The utilisation of vessels and third-party charter also increased,” the company says.


Turning point?

Since the end of June, crude oil prices have climbed from around US$42 (RM177) a barrel to US$59.02 on Sept 24 – the highest since July 2015 – so the change in fortune is not unique to Carimin.

Other O&G-related stocks have seen increased share price activity as well. Could this signal a turning point for the industry?

An analyst with a bank-backed research house says share prices bottomed out for most O&G services companies that did not go bust over the last three years.

“Staff cuts, disposals, and other cost-cutting measures were already factored in, so we are keen to find out what happens next,” he says.

The analyst says oil prices will likely remain between US$50-US$60 in H1 2018 even as concerns over oil reserves are raised.

“The price is going to remain around the US$50 level and will likely be sustained. We do not see prices hitting US$60 due to the Organisation of Petroleum Exporting Countries compliance issue and US pumping crude.

“We see some recovery in companies that carry out offshore work, although these are mainly smaller contracts for shorter periods.

“The growth we are seeing now is due to companies’ confidence that oil prices will not drop below the US$50 mark, and most of them have adjusted their costs to fit this level,” says the analyst.

He says multinationals will likely ramp up capital expenditure for exploration and production starting in H1 next year, while demand from China and India will continue to grow for liquefied natural gas as well as crude.

The analyst believes this is not a technical rebound, and there should be momentum starting H1 next year.

Carimin’s peer in the offshore business, Deleum Bhd’s share price has increased since mid-August when it rose from a 52-week low of 77 sen to close at 93 sen on Sept 28.

However, the company’s financial performance was not as positive. It registered an 8.7% net profit decline in Q2 ended June 30 to RM6.7 mil from RM7.34 mil previously.

This is attributed to weaker performance in the company’s power and machinery and integrated corrosion solutions segments. Its revenue was RM106.16 mil for the quarter – 8.4% lower than RM116.24 mil previously.

Uzma Bhd’s share price also gathered momentum since the beginning of September, gaining 10.8% to close at RM1.43 on Sept 28.

For its Q2 ended June 30, the company posted a nine-fold increase in net profit to RM5.6 mil from RM563,000 previously. The result is credited to better profit margins after having instituted cost-cutting measures.

However, Hong Leong Investment Bank is sceptical as to how long the share price momentum for O&G stocks will continue, and oil prices remain above US$50.

“Market sentiment has improved in the O&G sector, given the recent rally in share prices.

“However, we believe the oil supply disruption is not permanent. Fundamentals will revert to what we expect [a surplus in supply].

“According to the US Energy Information Administration, some pipelines are beginning to restart operations and oil producers are ramping up production. This points to a recovery in US production growth by the start of next year at the latest,” says Hong Leong Investment Bank.

The research house maintains a target of US$55 in H2 this year, even though it believes the market will face oversupply issues next year.

“Recent events [hurricane and supply disruptions] have raised optimism in the market, but we believe everything will revert to normal and there will still be oversupply next year,” its report says.

Affin Hwang Capital echoes a similar sentiment. “We saw domestic O&G contract flows and global oil prices take a breather in Q3. Sector earnings in Q2 this year were better year-on-year (yoy), mainly due to downstream players.

“We remain confident that contract flows this year will surpass last year’s levels. We tone down our expectations and now look at Brent prices to be in the US$50-US$55 range this year [from US$55] and US$55-US$60 next year

“Our long-term price view is unchanged at US$60-US$65,” says Affin Hwang.

On a global scale, Mergermarket which specialises in compiling merger and acquisition (M&A) data says, O&G majors have ramped up operations, anticipating that exploration activity will pick up soon.

It says M&As have been on the rise, increasing 40% yoy to US$270 bil so far this year.

Meantime, the potential listing of Saudi Arabia’s national O&G company Aramco could also have an impact on OPEC output. This is because its affiliation with the organisation risks allegations of price-rigging. – F Saad

This article first appeared in Focus Malaysia Issue 254.