This article first appeared in The Edge Malaysia Weekly on September 25, 2023 - October 1, 2023

THE recent strength in global crude oil prices is rejuvenating interest in the oil and gas (O&G) sector, in particular the offshore support vessel (OSV) segment. There are also a number of contracts being negotiated with national oil company Petroliam Nasional Bhd (Petronas), which could lead to changes in charter rates for OSVs and which have, in turn, resulted in gains in the share prices of O&G companies (see table).

“The O&G industry is making a comeback with higher utilisation numbers and better spot rates as there is no new capacity out there. We expect charter rates to [further] improve next year,” says an O&G executive from an offshore service provider.

This optimism comes on the back of the recent spike in the Brent crude oil price that touched a 10-month high of US$94.43 per barrel on Sept 18, its highest level this year. Oil traded at US$92.57 per barrel last Thursday.

Some quarters expect the Brent crude oil price to touch US$100 per barrel this year. Saxo Bank head of commodity strategy Ole Hansen said in a news report that interest in oil was brought about by Saudi Arabia’s announcement at the start of this month that it would keep its voluntary production curbs in place longer than previously thought.

Against this backdrop, OSV players are hopeful that the charter rates will improve further under the new contracts, as demand for services has increased and there is not enough supply in the market because no new capacity has been built since 2014.

Another industry source says many of the long-term contracts, especially for the OSV segment, are coming to an end this year and the ongoing renegotiations are looking positive.

“Many of the long-term contracts are coming to an end and the bidding processes are taking place for five- to six-year contracts, especially for the OSV segment. I would say this is like resetting the rates for the service providers … But we are not sure what the rates are like as we expect the award to happen in the first quarter of 2024. It remains to be seen if the rates could go back to pre-2014 oil boom period (2010-2014),” he tells The Edge.

It is worth noting that earlier this year, Petronas had renegotiated higher daily charter rates for the vessel providers based on the Cost Reduction Alliance 2.0, or Coral 2.0, a cost-optimisation exercise that commenced in 2015 and was slated for a five-year period.

Petronas also increased the lifespan of the vessel classes such as anchor handling tugs in its contracts to 20 years from 15.

In the current environment, a number of O&G service providers have turned the corner since the end of last year, with many of them showing significant improvements in the second quarter of 2023 (2Q2023) financial results.

Companies such as Dayang Enterprise Holding Bhd, Uzma Bhd, Petra Energy Bhd, Marine & General Bhd, Yinson Holdings Bhd and Sapura Energy Bhd posted a more than 50% increase in their recent quarterly results compared with the same quarter a year ago.

It is worth noting that shares in Naim Holdings Bhd and its subsidiary Dayang, which controls Perdana Petroleum Bhd, have seen a spike over the last three months, sparked by talk of a possible privatisation exercise.

Meanwhile, an O&G executive points out that players in the industry will need to start thinking about what is next for their respective companies to ensure sustainable growth. “Companies that had undertaken painful corporate exercises in the past to improve their financial position and increase their cash coffers stand to benefit at the current upward cycle of the O&G industry.

“I believe this time around, an industry-led consolidation could take place as companies are in a healthy financial position,” he tells The Edge. He says this is especially important for vessel operators to achieve economies of scale and diversify into other segments to take advantage of the increasing crude oil price environment.

Hong Leong Investment Bank Research has upgraded the O&G sector to “overweight” from “neutral” as it expects the oil majors to maintain their capital expenditure (capex) plan to take advantage of the elevated oil price movement.

The research house says Petronas’ capex stood at RM21.4 billion for the first half of 2023, of which RM10.5 billion was for the domestic market — a 48% increase from the same period last year. “We maintain our Petronas capex projection of RM50 billion for 2023 and we believe this would augur well for the local O&G sector as most of the listed service providers are heavily reliant on Petronas as a major client. We note that the bulk of the group’s capex is usually back-loaded in 4Q.”

A market observer points out that the charter rates for OSVs had improved by 10%-15% last year, and another 10% this year. He is optimistic that the rates could improve further next year, especially with higher demand in line with increasing capex by oil majors and that 90% of the O&G activities in Malaysia are mainly located offshore. He describes the O&G sector as being “out of the woods” since last year, and this year is about maintaining the performance. “At the moment, there is no motivation for anyone to build new vessels as the banks are not very keen on the O&G sector. The average age of the OSV vessels is more than 10 years.”

Banks are still shying away from the sector after years of depressed operating environments, which had resulted in many companies going belly up due to badly timed expansion plans. For almost nine years, the local O&G players have been in limbo, sitting on huge debts while surviving on low margins and slowing demand for new jobs as oil prices wallowed.

It is worth noting that one of the largest debt restructuring deals undertaken in corporate Malaysia involves O&G stalwart Sapura Energy Bhd and more than RM10 billion of borrowings, and it is still ongoing. Coupled with the issues at Serba Dinamik Holdings Bhd, it has resulted in banks being unwilling to provide new financing lines to the sector.

The sector’s long downward cycle period has seen local O&G service providers shying away from increasing capacity, which could result in better charter rates with the increase in offshore activities, according to market observers. 

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