KUALA LUMPUR: Malaysia’s oil and gas services providers will need to diversify revenue base to mitigate their operations against oil price shocks, analysts said.
They must also increase operational efficiency to lift margins or venture into alternative energy business to reduce dependency on oil prices.
MIDF Research analyst Noor Athila Mohd Razali said tumbling oil prices could delay the award of new contracts and renewals. This would result in margin compression for O&G service providers.
“The low oil price environment will have an impact on the entire O&G value-chain be it directly or indirectly.
“The upstream producers will be more directly impacted by the low oil price environment as lower revenue as a result of higher cost of production and low selling price will weigh on earnings,” she told the New Straits Times.
For downstream players, Athila said feedstock prices would be more favourable following the drop in oil price.
However; the average selling prices of petroleum derivative products such as petrochemicals will be soft as well.
“This in turn will lead to thinner spread between the selling price and cost of production,” she said.
Athila said O&G players preferred oil price to trade between US$65 and US$75 per barrel, enabling them to stay in production and drive offshore services activities.
She expects the current oil condition to normalise in the second-half (2H) of 2020, driven by voluntary production cut by US shale producers, signs of Covid-19 cases tapering down which will gradually restore demand and lift-off travel bans worldwide and potential reconciliation between the Organisation of the Petroleum Exporting Countries (OPEC) and Russia.
QI Global chief economist Shan Saeed said companies need to lean and think in order to be resilient by keeping their overhead cost and other charges low.
He said oil prices would remain subdued in the near future. This would be a good opportunity for industry players to renegotiate their loans with banks as the global economy was heading for lower interest rate regime.
“With oil prices depreciating by almost 30 per cent, Saudi Arabia, the US and Russia are going to feel the pressure,” he said, adding that oil prices can be sustained at between US$50 and US$60 per barrel.
With weaker US dollar, he said commodities prices should rise again in the foreseeable future.
Geopolitical risk was coming back into the market, making oil investors nervous and uncertain, he added.
“Uncertainty kills business and reduces capital expenditure in the energy market. It will go down between US$750 billion and US$1 trillion in the next six to nine months,” he said.
Shan said all O&G producers need to be on the same page in terms of price and production outlook, adding that the oil market would do the balancing act at the expense of US oil producers.
JF Apex Securities Bhd research analyst Lee Cherng Wee said upstream players were more affected as lower oil prices would mean lower oil producers getting lower revenue.
“The whole industry will be affected as lower oil price discourages further exploration and investment, meaning less jobs and contracts for the players,” he added.