KUALA LUMPUR: While oil prices are climbing, the local oil and gas (O&G) sector particularly service providers, are facing an uphill battle in trying to recover.
Is the issue, banks?
Companies in trouble such as Sapura Energy Bhd could be a ticking time bomb if they were not able to convince debtors to provide a lifeline, industry observers said.
At the same time, it was clear that Sapura Energy needed to get its act together, they added.
"While they seem to be making a dent in turning the company around, particularly since its second quarter results announcement last year, time is not on their side. The recent termination of its Yunlin contract could not have been an easy call to make, but these are calls that are necessary for a bleeding company," an industry observer said.
Cashflow seems to be a challenge for Sapura Energy and for this, it needs muscle power from banks.
Industry observers felt that Sapura Energy might well be on its way to becoming a Practice Note 17 (PN 17) company if it was not able to convince lenders.
In March 2021, Sapura Energy signed multi-currency financing facilities agreements or MCF 2021 to refinance its existing borrowings.
Today, the company owes the banks about RM10 billion, against its market capitalisation of about RM700 million.
According to banking sources, Sapura Energy had paid the banks over RM15 billion in principal repayments, interest and fees over the past eight years.
The sources added that it was paying the banks about RM500 million a year and was expected to pay another RM3 billion-plus in just interest alone to the banks by 2027.
"With so much already paid and continuing to be paid, it looks like that is the hiccup they are facing in trying to repay vendors and keep the business going at the same time," a source said.
According to a seasoned O&G player, the banks continued to make astronomical profits but when it comes to injecting money into the ecosystem by cutting on their exorbitant piece of the pie, they were always reluctant.
"Who suffers? In the case of Sapura Energy, it's the vendors, especially those small mom and pop establishments in places like Sitiawan, Manjung, Pasir Gudang, Labuan and Miri, that ultimately suffer," he said.
Sources shared that Sapura Energy were in talks with the banks to ensure it had enough to pay its vendors and continue work.
However, according to the sources, it seemed that while the banks had been collecting their dues from Sapura Energy, they did not seem to be too keen to extend a lifeline.
An ex-banker said: "Sapura Energy could go the way of Genting Hong Kong if lenders are not careful and no one wants that."
The ex-banker added that banks needed to play ball if the local O&G service providers were to be sustainable.
Banks also need to come to the table with a mindset of coming to a win-win solution and not just on a solution that favours them.
"The way the industry competes for jobs needs to change. Currently its self-sabotage, with those winning bids, doing so with razor thin margins. This is not sustainable," an O&G specialist said.
"We need to create a bigger pie. It is not enough for oil prices to go up, Malaysia needs to increase its investment into upstream oil and gas in order for the ecosystem to thrive."
On Sapura Energy, the specialist said: "Sapura Energy remains an important part of the O&G value chain. It is very disconcerting the fact that they are not able to keep up their payments to vendors. More than 3,000 vendors are said to be affected. Lenders and Sapura Energy need to come together to find a middle ground so that the vendors are not impacted.
"If O&G service providers like Sapura Energy survive, they will bring with them thousands of SMEs. Vice versa if they fail, they will bring down with them thousands of SMEs."
The specialist added that no matter what, it could not be discounted that a great deal of the challenges and issues that Sapura Energy was facing today was certainly legacy related.
"No doubt, the new team has been there for a bit over a year but if one goes through the reality of it, Sapura Energy certainly has an iceberg of problems that did not crop up just over one year, it has been snowballing over the last many years," he said.