THE recent rally of global crude oil prices has yet to positively impact the share prices of locally listed oil and gas (O&G) service providers, which have been underperforming for many years.
The KL Energy Index has been the worst-performing index on Bursa Malaysia since the beginning of 2020, declining almost 40% since then.
This is a stark contrast to the movement of the Brent crude oil, which has risen by more than 55% year-to-date, to trade above US$80 (RM333) per barrel, the highest since 2018.
Some quarters suggest that investors may be shying away from the O&G sector as many service providers are still stuck with mounting debt issues following the 2014 crude oil price rout.
Last year’s Covid-19 pandemic had put a further dampener on the industry.
But there could be some players benefiting from the run up in crude oil prices. Little known Icon Offshore Bhd could be one.
Icon Offshore was one of the biggest losers during the oil crash in 2018 due to its heavy asset holdings. It was listed in 2014 with a market capitalisation of more than RM2bil, only to see that sliding to as low as RM297mil today.
Things have changed since the group undertook a massive corporate exercise in 2020. That included a RM450mil impairment and a fundraising through rights issue to raise RM250mil.
That exercise had set the tone for Icon Offshore to be more nimble and on a better footing.
Since then, Icon Offshore has diversified into the O&G drilling business after it bought a subsidiary of Perisai Petroleum Bhd that owns and operates a jack-up rig known as Perisai Pacific 101 (PP101) at a price tag of US$40mil (RM173mil).
Over the past six quarters, Icon has been reporting profits except for the quarter ended March 31, 2021 and the quarter ended Dec 31, 2020.
Icon Offshore managing director Datuk Seri Hadian Hashim says the diversification efforts that the group had embarked on last year has boosted its overall performance.
Icon Offshore has long been known as one of the largest pure play offshore service vessel (OSV) providers.
Today, Icon Offshore’s revenue contribution from OSV Malaysia constitutes about 40%, followed by OSV Brunei at 30%, while its drilling segment contributes the remaining 30%.
Moving forward, Hadian plans to transform the group into an integrated service provider through mergers and acquisitions.
“We plan to build on these positive results and continue to transform Icon Offshore into an integrated service provider with broader, more holistic and higher-value-added solutions.
“The plan is to expand our offerings that will differentiate us from our competitors and add new revenue streams to the business,” he tells StarBizWeek.
Recovery plan on track
Over the last two years, Hadian has been working on a fundamental shift in the group’s management to streamline its operation, workflows, project delivery and procurement processes to reduce cost and enhance efficiency.
“I believe companies should also prioritise rewarding their people to recognise their good work and give them the opportunities, and in turn, they will feel motivated,” Hadian says.
“Through technology adoption such as asset monitoring systems and greater management involvement, we have reduced breakdown days of our OSV vessels by more than 60%, which in turn has lowered our costs of repairs and maintenance.
“In addition, we have realigned our OSV portfolio to bid for long-term contracts. We are focused on regional diversification and better fleet utilisation,” he adds.
At the moment, three of its OSV vessels are deployed in Brunei.
Icon Offshore has a fleet of 26 OSVs, of which almost 90% are being utilised, compared with a utilisation rate of 72% in financial year 2019 (FY19).
For the third quarter ended Sept 30, 2021, Icon Offshore reported a 33-fold jump in net profit to RM14.37mil, from RM426,000 a year earlier. This was due to contributions from its drilling segment that commenced operations in April, coupled with higher revenue from its OSV segment.
Maybank IB Research points out that Icon Offshore is ahead of its peers in cost management and the research house expects the group to secure more jobs.
“The new management with a commendable track record gives confidence to the market and eliminates past negative perceptions including corporate governance and cost management,” Maybank says in a recent report.
The research house expects drilling business to become the main earnings driver for the group, generating US$6mil (RM25mil) to US$8mil (RM33mil) per annum in FY21 and FY22.
Hadian took the helm of Icon Offshore in September 2019 with the task of turning the group around.
He has more than 40 years of experience in the O&G industry, beginning his career at Sarawak Shell Bhd and after 12 years, leaving to pursue entrepreneurial interests in various O&G companies, notably Itochu Pipe and Tube Asia Corp Sdn Bhd, Integrated Petroleum Services Sdn Bhd and Sona Petroleum Bhd.
Prior to Hadian’s appointment at Icon Offshore, the group did not have a CEO for two years after the departure of Datuk Seri Amir Hamzah Azizan in 2017.
Service providers lagging behind oil rally
Hadian says Icon Offshore is in a good position now to embark on a new growth trajectory at a time when crude oil prices are expected to remain high.
“Aside from the spike in oil demand globally, underinvestment in the sector, bigger dividend payouts by oil majors and the general higher spending on environmental, social and governance (ESG) areas are fuelling the current high prices,” he says.
Industry experts point out that with more capital being allocated to ESG-related projects, including the energy sector, this has led to lesser investments going into traditional O&G activities. However, as the greener energy projects are still in early stages, they are unable to cope with the rising demand for energy, especially with the ongoing global resumption of economic activity. This, in turn, is leading to higher demand and driving up oil prices, at least for now.
Not surprisingly, Hadian expects rates for oil field services to improve next year due to the shortage of equipment after years of austerity in the O&G sector.
“There is no new build of assets and service providers are likely to maintain their spending discipline,” he adds.
Jack up rig: Icon Offshore diversified into oil drilling business in April 2021
Both the Organisation of the Petroleum Exporting Countries and the International Energy Agency expect oil demand to increase until at least the 2030s.
According to Goldman Sachs, Brent crude oil prices could reach US$110 (RM458) per barrel by next year, a 30% jump from the current level of US$83 (RM346).
Kenanga Research expects 2022 will be a better year for local O&G service providers as activities pick up pace following project delays due to lockdown measures.
“We believe the sector is currently at an inflection point, with 2022 posing as the year of recovery for activity levels. Petronas will be looking at a capex spend of RM40bil-RM45bil per year for the next five years,” Kenanga Research points out in a recent report.
The research house reckons that there will be selective pockets of opportunities for investors to bottom-fish in the O&G sector, given the current valuations coupled with the recovery theme.
Meanwhile, Hadian believes the confidence in the O&G sector would depend on the growth momentum and activity level, as well as companies’ financial health.
Icon Offshore currently has RM330mil of borrowings and RM175mil of shareholders’ loans. It has cash balances of RM86mil.
Hadian says the group is looking to refinance some of its debt to lower its interest payments.
He adds: “Look at our net borrowing. We are currently at a healthy and comfortable level. Our performance has been on a growth trajectory, which will translate to significant improvements in Ebitda (earnings before interest, tax, depreciation and amortisation) and cashflow, and subsequently will improve the group’s overall position.”
He says many companies in the sector are laden with high debt and are currently under various forms of restructuring.
“Investors are still waiting to see whether the pick-up in activities are sustainable on the back of rising oil prices before they flock in.
“Icon Offshore is witnessing strong recovery signs as reflected in the positive movement of oil prices in 2021,” says Hadian.
Psv Amira: Icon Offshore owns 26 OSV vessels with 90% utilisation rate.