THE crude oil saga continues to be a sizzling one, with everyone keeping a keen eye on its collapsing prices. This week saw United States crude oil prices falling below zero for the first time in history.

The world’s most important commodity is losing its value due to severe oversupply and barely enough demand to support it, as almost half of the world’s population are in some kind of lockdown.

The West Texas Intermediate (WTI), the benchmark for the US oil industry for decades, fell from US$17.85 per barrel to minus US$37.63 in just one day this week.

The coronavirus pandemic has crushed the demand for oil so hard that even with the upcoming supply cut by the Organisation of the Petroleum Exporting Countries (Opec), Russia and other producers, a group known as Opec+ has done so little to sustain oil prices.

Note that Opec+ has agreed to cut supply by 9.7 million barrels per day or 10% of total global production starting May 1.

The price of Brent crude, which is more related to Malaysia, felt the heat from WTI and touched US$15.98 per barrel, the lowest since June 1999.

Oil prices have since recovered to US$21.56 per barrel for Brent and US$16.78 for WTI, but the crash this week indicates that the carnage is far from over, as long as the coronavirus issue still persists.

Since the start of the year, Brent has fallen more than 65%, while WTI has dropped by around 75%.

This week’s crash was so severe that there could be more cuts in production across the world.

For Malaysia, the collapse in the price of crude oil will cause the government to lose billions of ringgit in oil revenue.

Petroliam Nasional Bhd (Petronas) had earlier said that its dividend for this year will be based on its financial performance.

However, a Bloomberg report quoting sources this week stated that the national oil company could dish out a higher dividend this year, amounting to some RM36bil, to support the Malaysian government’s stimulus package.

The report said that Petronas could increase its dividend payout by more than RM10bil on top of its targeted RM24bil dividend to the government this year.

However, oil majors like Petronas are facing significant challenges in the current environment. They are now forced to cut their capital spending, delay projects, cut production and increase their debt.

For instance, Petronas is currently raising US$6bil from the bond market, a move that marks its return to the international US dollar bond market.

The proceeds will be used for refinancing, capital expenditure (capex), working capital and general corporate purposes.

Most oil majors are cutting their capex for this year, but Petronas said it is going to maintain its domestic capex of RM26bil-RM28bil.

This would provide some relief to the local oil and gas (O&G) sector.

According to an article by the Financial Times, the current oil crash is unlike the previous ones. It said oil companies cannot rely on their refining business to offset a drop in exploration and production earnings.

Lockdown and travel bans also mean there is limited demand for refined fuels such as petrol and petrochemicals, it said.

Negative outlook for local service providers

Analysts warn that local O&G service providers will face earnings and margin compression should oil prices remain low.

MIDF Research analyst Noor Athila Mohd Razali says she remains cautious on the outlook for the O&G sector for this year, as the low oil price environment tends to result in a cut in capex by oil majors.

“The low oil price environment also means there will be fewer new contracts for O&G service providers, and there could be delays in awarding extensions to existing contracts.

“Furthermore, margins are also expected to be compressed, given that producers are now more cost-conscious than in a higher oil price environment.”

With O&G service providers barely recovering from the 2014-2016 oil crash, the new plunge in oil prices could pose risks to them, especially the heavily indebted ones.

During the oil price rout in 2014 to 2016, companies such as Ezra Holdings Ltd, Perisai Petroleum Teknologi Bhd and Scomi Energy Bhd had defaulted on their loans.

Schroders commodities head Mark Lacey says the biggest impact would be bankruptcies, which would not be limited to the US, as it would also likely occur in Asia, Latin America and Europe.

“Despite many oil companies cutting capex by up to 50%, many are going to go bankrupt. Around 80 O&G companies filed for bankruptcy in the 2015 sell-off.

“The current situation is far worse than in 2015. So, the industry is going to look very different after this washout, ” he says.

Some locally listed O&G companies already have stretched balance sheets. A number of them have seen their long-term debt levels rising over the past year.

BUMI ARMADA BHD, for example, recorded a 111.42% increase year-on-year (y-o-y) in its long-term debt from RM3.32bil to RM7.01bil as at the year ended Dec 31,2019.

This was after it converted a huge chunk of short-term debt to long-term liabilities.

DAYANG ENTERPRISE HOLDINGS BHD had a huge jump in long-term loans and borrowings from RM24.43mil as at end-2018 to RM697mil as at end-2019. It was largely due to capital injection into its subsidiary Perdana Petroleum Bhd.

Serba Dinamik Holdings Bhd’s long-term borrowings have risen more than two-fold from RM1.11bil to RM2.95bil, while Yinson Holdings Bhd ’s is up 22% from RM2.75bil to RM3.35bil.

Yinson’s debt is higher due to the company winning more floating production, storage and offloading contracts.

There are also companies that have reduced their debt level through the sale of assets and fund-raising exercises.

For instance, SAPURA ENERGY BHD saw a 23.32% reduction in long-term borrowings from RM11.15bil as at Jan 31 last year to RM8.55bil as at Oct 31, following a massive rights issue exercise.

Still, that may not be enough to help the company see through these difficult times.

Earlier this month, Sapura Energy said it was in discussions with banks to refinance its borrowings.

CGS-CIMB Securities Sdn Bhd analyst Raymond Yap wrote in a recent note that Sapura Energy will need bankers’ support to continue operating as a going concern, and that potentially, large asset impairments are on the horizon for the company.

“Operating cash flows may be insufficient to repay debt principals from financial year 2022 onwards, requiring bank refinancing, rescheduling or additional loans, ” he said.

Meanwhile, Icon Offshore Bhd and Velesto Energy Bhd have seen some dips in their long-term debt by 32.34% and 27.25%, respectively.

In Singapore, the case of Hin Leong Trading and Ocean Tankers is well publicised. The giant oil trader has run into financial difficulties and faces possible bankruptcy, as the coronavirus pandemic shrinks crude oil demand and prices.

The long road to recovery

The International Energy Agency estimates that demand for oil in the month of April will be 29 million barrels a day compared with 100 million barrels a year ago, which is a fall of 29% and at a level last seen in 1995.

But can crude oil demand and prices recover to pre-crisis levels?

It should be noted though that even if consumption recovers to pre-crisis levels, crude oil prices will still be under pressure due to the massive stockpile of oil that exists.

According to Schroders’ Lacey, at current prices, many oil companies around the world are starting to “shut-in” production. This is when they put a cap on production that’s lower than the potentially available output.

“At the start of March, the shut-ins were gradual but they are now accelerating and a lot of these will be permanent, with many fields potentially not restarting even if prices recover back to US$60-US$65 per barrel.

“Industry research suggests that as much as four million to seven million barrels a day could be permanently lost as a result of these shut-ins, ” he said.

He pointed out that Monday’s US crude oil price action was the result of physical traders that had committed to taking delivery in Oklahoma not being able to store the crude, to the point that they had to pay storage holders one-off payments of between US$40 and US$50 per barrel to hold the crude for a few days.

“I would expect the June and possibly July WTI contract to remain extremely volatile over the next few weeks, as full storage in Oklahoma is unavoidable, ” he said.

Around the world, Lacey said storage terminals will fill up and this will force even bigger cuts from Opec and non-Opec producers.

“The shock to the global oil market as a result of the Covid-19 restrictions is unprecedented. The oil market has never experienced a fall in demand of this magnitude.

“From what we are already seeing, this will have a long-term impact on the supply dynamics of the oil industry for many years to come.

“And despite recent cuts to production, the most important driver for any recovery will be demand, ” he said.