Tuesday, 25 February 2014

Good warning on perils in the oil and gas industry

Article in The Star: "Beware of risks in investing in sizzling oil and gas".

"... making money from the O&G business isn’t easy. Our market has seen its fair share of O&G companies that had stumbled in the past.

As examples, consider the stories of Ramunia Holdings Bhd, KNM Group Bhd Malaysia Marine, Heavy Engineering Holdings Bhd (MMHE) and the Scomi group. These stocks were at one point the darling of investors.

But at some point, they struggled to execute their businesses well. O&G fabricator Ramunia had slipped into PN17 status in June 2010. To quote from a Maybank research report dated April 2010: “Ramunia is in bad shape operationally and financially. It faces declining order book, earnings and shareholders funds due to poor project execution and negative cash flows.”

KNM Group Bhd was another high-flying oil and gas player. But it too did stumble, suffering a quarterly loss in 2009 and a full year loss at group level in 2011. Among the reasons for its losses was its high fixed cost and debt levels. It’s aggressive overseas expansion also saw it having to provide for foreseeable losses in Brazil, Canada and Indonesia.

The Scomi group had encountered similar problems with its overseas assets while giant fabricator MMHE had suffered from higher-than-expected expenses incurred from some of its projects and from the share of losses from jointly controlled entities’ performance.

One problem is that the O&G business, like many other sectors, is cyclical. You may invest during peak times but then get saddled with high fixed costs and low utilisation rates when the cycle hits a downturn.

Getting the right expertise to executive projects profitably is another challenge."

Ze Moola has written many articles about three of the above mentioned companies:

- Ramunia
- Scomi

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