This article first appeared in The Edge Malaysia Weekly on September 26, 2022 - October 2, 2022
SEVERAL oil and gas companies specialising in the provision of drilling fluids are waiting in anticipation of a relatively large tender that is likely to be announced soon by Petroliam Nasional Bhd (Petronas).
Industry sources say the contract to supply drilling fluids is likely to be valued at between US$400 million (RM1.83 billion) and US$500 million, and for a five-year duration, or between US$80 million and US$100 million a year.
An executive from a company familiar with the contract explains that it is a “call out contract” — meaning that the quantum paid will be for the drilling fluids used or required. Another executive familiar with the matter anticipates a closed tender, with a limited number of players invited to bid.
“It (the tender) could happen anytime now. We (drilling fluid suppliers) have been waiting for a few months now for it,” he said early last week.
In short, drilling fluids are used to reduce friction during exploration works.
Petronas’ Activity Outlook 2022-2024 indicates that the existing drilling fluid contracts will expire in the middle of next year, which makes it likely that tenders will be called soon. The report also shows heightened exploration activity, with 22 rigs being utilised this year, 24 in 2023 and 29 in 2024. In 2021, only 16 rigs were utilised, possibly due to the Covid-19 pandemic.
“Of course, exploration activity is also dependent on oil prices. If things are maintained, there will be a lot of activity, but if oil prices plunge again, exploration will halt and there will be little use for drilling fluid. Oil prices can be volatile, as you know,” the executive from the company familiar with the contract explains.
To recap, Brent crude hit US$145 per barrel in mid-July 2008, but tumbled to US$26 in February 2016. After a few rallies, it plunged to US$20 in April 2020 — its lowest since early 2002. Brent crude has been doing well and is now trading at below US$90 per barrel, having only fallen below the US$100 band in late August this year. It averaged US$96.46 per barrel over the past 12 months.
While most of the players involved in the supply of drilling fluids are international companies, such as Haliburton and Baker Hughes, Cahya Mata Sarawak Bhd (CMS) is likely to be in the running, having recently finalised its acquisition of Scomi Energy Services Bhd’s drilling fluids and related businesses for RM21 million. The acquisition was concluded on Sept 6.
Nevertheless, there are likely to be a number of companies sharing the jobs, as Petronas would want to split its risk and not place all its eggs in one basket.
While the RM21 million forked out by CMS may be considered small by a conglomerate’s standards, the drilling fluid services market is competitive and known to have low profit margins.
Despite the low margins, CMS with its strong balance sheet and clout may be able to grow the business, especially in oil-and-gas-rich Sarawak.
While there is also talk that existing drilling fluid contracts may be extended pending the tender being called, which would benefit companies such as CMS which have an existing contract, this remains conjecture.
Nevertheless, CMS, which is among the most prominent companies in Sarawak, has a finger in many lucrative pies — cement, infrastructure, property development and road maintenance, among others.
At its close of 86.5 sen last Friday, which is a 52-week low, CMS had a market capitalisation of RM929.2 million.
For its six months ended June 2022, the company chalked up net profits of RM111.59 million on the back of RM423.78 million in revenue. For the corresponding period a year ago, it registered net profits of RM125.18 million on RM387.06 million in turnover.
As at end-June this year, CMS had cash and bank balances of RM208.88 million, and long-term borrowings of RM272.45 million and short-term debt commitments of RM146.37 million. Its retained earnings stood at RM2.21 billion as at end-June.
CMS is largely controlled by the family of Tun Abdul Taib Mahmud, the current governor of Sarawak who was the state’s chief minister for 33 years from 1981. His son Datuk Seri Sulaiman Abdul Rahman Abdul Taib is the managing director of CMS, while Abdul Taib’s youngest daughter Datuk Hanifah Hajar Taib-Alsree has a 12.75% stake in CMS, and another daughter Jamilah Hamidah Taib has 12.55% equity interest in the company.
According to CMS’ annual report, there is a 10.33% block of CMS shares held under the name of Abdul Taib’s late wife, Datuk Lejla Taib. Other substantial shareholders include Lembaga Tabung Haji with 7.59% and the Sarawak Economic Development Corp with 5.67% equity interest.
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