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No silver lining in sight for O sector

AS it appears, there no silver lining in sight for the oil and gas (O sector that continues to see worrisome developments.

Earlier this week, the United States said it would go ahead with its plans to ramp up production this year and the next. This is notwithstanding the 60% slide in oil prices and indications that the US shale gas industry is more resilient that some of us think.

If the United States goes on with this increased production and the Organisation of the Petroleum Exporting Countries (Opec) continues with its promise of not deviating from its strategy of keeping output steady, then one can only expect more downward pressure on oil prices.

No wonder then that billions of dollars worth of O and even petrochemical projects around the world are being axed or frozen as oil majors look to reduce costs. For example, Royal Dutch Shell is dropping its plans for a US$6.5bil (RM23bil) project to build one of the world biggest petrochemical plants with Qatar Petroleum; and UK based Premier Oil is delaying a US$2bil project off the Falkland Islands until there was a recovery in oil prices.

Notably, the oil majors are also looking to squeeze their contractors and suppliers for their projects around the world, including in South East Asia. This is in order to make their projects viable in light of the current price of oil.

This clearly spells some headwinds for local O players.

Even Petroliam Nasional Bhd has announced a cut in capital expenditure next year, which
cheap oakley sunglasses wholesale would hit local players.

The concern is whether the cash flows of locally listed O firms will be able to support their debt levels.

According to one recent analyst report, the total outstanding debt of the 20 top listed O companies in Malaysia amounts to a staggering RM34bil. Three firms dominate the list and collectively hold RM25bil of debt. They are SapuraKencana Petroluem Bhd (RM15.8bil), Bumi Armada (RM6.5bil) and UMW Oil and Gas Bhd (RM2.1bil).

The report by Nomura Research analyst Julian Chua was seeking to assess the exposure that that local banking sector had towards the O sector.

Chua final analysis was a sanguine one. It opines that the O sector does not pose a significant risk to the overall asset quality of the banking sector in spite of the sharp correction in global crude oil prices.

That may be so. But detailed in that report are respective debt positions of locally listed O players.

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This information is useful and gives investors an insight into the debt servicing ability of the local O companies.

According to the report, SapuraKencana had an interest coverage ratio of 3.4 times, which the research house deemed as adequate.

This is
cheap oakleys a ratio used to determine how easily a company can pay interest on outstanding debt and is calculated by dividing a company earnings before interest and taxes by the company interest. Typically, an interest coverage ratio of around 1.5 times or lower isn good as it means that the company may face problems meetings its interest expenses.

However, SapuraKencana net debt to equity at 1.25 times was deemed to be high but the analyst added that this was buffered by the fact that 90% of the oil giant debts are due after one year and that the group had a
replica oakleys cash balance of RM1.9bil.

Whatever the case, investors would need to pay close attention to these numbers and ratios, considering that the fear is the collapsing oil
cheap replica oakleys prices could impinge on the cash flows of O firms, which in turn
cheap oakley sunglasses would hamper their debt servicing ability.

For
cheap fake oakleys example, Perisai Petroleum Teknologi Bhd, a jack up rig operator, while having a relatively low net
fake oakleys
fake oakleys debt to equity ratio of 0.8 times, has interest coverage ratio at 1.8 times.

Two O firms have negative interest coverage ratios, raising questions about their ability to service their debt, namely Shell Refining Co Bhd and TH Heavy Engineering Bhd (see table). That of course does not mean the end of the road of these companies. There are solutions such as debt refinancing, and liquidation of assets to lower borrowings, among others. However, at a time when the price of oil has fallen by 60%, with no sign of any near term improvement, it will be challenging to say the least, for O companies to climb out of their debt woes.Articles Connexes:

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