KUALA LUMPUR (April 11): Consolidation of oil and gas service and equipment (OGSE) firms can help address structural challenges which presently hinder the industry's international competitiveness, including a lack of technology development, according to a recent feature report by Kenanga Research.
In the report, the research house noted that presently, local players are over-reliant on domestically derived revenue, with 68% of the industry’s income coming from local activities.
Proposed consolidation and lack of international competitiveness were some of the key takeaways from Kenanga's recently organised seminar on the oil and gas sector, featuring speakers from the Malaysia Petroleum Resources Corporation (MPRC) and Velesto Energy Bhd, which shared insights on the activity outlook, as well as their approach to sustainability.
Kenanga said while activity levels for OGSE players are on the rise, the industry still faces many structural challenges, including their international uncompetitiveness and over-reliance on locally derived revenue.
The research house noted that the industry’s heavy focus on local content can be boiled down to several key reasons including inadequate technology development, with research and development (R&D) activities considered to be low relative to industry size.
“This has resulted in local OGSE technology not widely regarded internationally in the field,” it added.
The other reasons cited are poor talent development and management as well as trade promotion and highly fragmented industry of over 2,300 firms, from which most have poor financial strength and working capital capabilities.
“One possible solution is M&A(mergers and acquisitions) — consolidating resources in order to form a larger consortium in order to increase international competitiveness.
“Nonetheless, without a strong push factor, much remains to be seen. Currently, the local OGSE space is still largely dominated by the public-listed companies,” said Kenanga, noting that amongst 2,376 registered OGSE, only 23 of them are public-listed companies (PLCs). Nonetheless, these 23 PLCs contributed 52% of the industry’s total revenue, 72% of total profits before tax, and 89% of total fixed assets.
Malaysia’s oil and gas services and equipment industry contributed some 5-8% of the country’s gross domestic product (GDP), according to the feature report.
In 2021, the report showed the OGSE industry generated some RM68 billion of revenue, with the top 74% coming from the top 100 OGSE (OGSE100) companies as ranked by the MRPC while 14% was from non-OGSE100 mid-tiers and 12% from non-OGSE100 small and medium enterprises (SMEs).
“As Malaysia transitions towards a low carbon economy in line with the national aspiration to achieve net zero GHG emissions by 2050, sustainability is no longer an option for OGSE players,” said Kenanga, which noted the 2,376 OGSE players are committed to achieving the national net-zero aspiration by 2050, as guided by MPRC.
Achieving sustainability means maintaining the sector’s social “licence to operate”, it added, citing the MPRC.
As an agency under the Ministry of Economy, the MPRC is tasked with providing recommendations and guidance and implementing initiatives to drive the sector’s development towards cleaner and sustainable energy.
Towards this end, the MPRC and the Economic Planning Unit have formulated the National OGSE Sustainability Plans (NOSP) in November last year.
The report noted that in terms of sustainability reporting, OGSE100 companies are doing well as 81% (81 out of 100) of them reported sustainability practices in FY2021 with 23 of them public listed companies (PLCs).
Kenanga cited the MPRC report that out of the 23 companies, only eight have reported progress towards their long-term targets while the other 15 reported targets without disclosing current progress.
“Based on the MPRC's sustainability assessment on OGSE100 companies in two areas — sustainability best practices and global reporting standards alignment — the OGSE100 companies had an average score of 2.1, in comparison with the regional group’s average score of 4.5 and a typical global OGSE leader’s score of 7.0 to 8.0.”, it observed.
Kenanga noted that six OGSE100 are included in Bursa Malaysia’s FTSE4Good Index, a testament to their commendable ESG performance.
“One company, MISC, is listed on the Dow Jones Sustainability Index, making it one out of a target of at least five companies as set by the MPRC to be included in a reputable global sustainability index.
“While it is encouraging to see that OGSE companies are taking steps to enhance their ESG efforts, there is still much work to be done,” said Kenanga which maintained its Neutral call on the sector, with its top picks Bumi Armada Bhd (OP, TP: RM0.75) and Wah Seong Corporation Bhd (OP, TP: RM0.97).
Source: TheEdge - 12 Apr 2023
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