Business

Saturday February 7, 2009

Wah Seong sees more jobs in the pipeline

By ELAINE ANG


It believes current depressed oil market will not stop committed and planned projects.

THE current low crude oil price has raised concerns that oil and gas (O&G) projects may be delayed and even scrapped as oil majors pull back on exploration and production investments thus affecting the business of local O&G support services players.

Most analysts have turned bearish on the sector while some industry players are anticipating a slowdown in business and worried of order book replenishment.

O&G pipe-coating specialist Wah Seong Corp Bhd, on the other hand, is still positive about the availability of pipe-coating jobs and its ability to secure them.

Deputy group managing director Giancarlo Maccagno sees pipeline infrastructure spending as a planned expenditure which is not greatly driven by today’s low oil prices.

While Maccagno acknowledges that low oil prices for a long period may defer O&G companies’ capital expenditure (capex), he does not believe the current depressed oil market will stop committed and planned pipeline projects.

Opportunities elsewhere

He expects Wah Seong’s existing projects to continue as O&G companies still need to deliver to the market.

“As for new projects, the contraction in markets such as North America has not stopped us from receiving requests to tender for contracts in other parts of the world, including Europe, Africa and Australia.

“We have tendered for a number of very large jobs that are due to be coated in 2010 to 2012 and we expect these projects to proceed as planned,” he says.

The large projects that Wah Seong is actively pursuing include the Chevron Gorgon liquefied natural gas (LNG) (900km) and Browse LNG (1,200km) in Australia, and the Exxon Papua New Guinea LNG (900km).

Giancarlo Maccagno

The tender for the Gorgon LNG project is expected to be awarded by August.

According to Maccagno, Wah Seong has a 50% chance of securing these projects as its only other competitor in the Asia-Pacific is US-based Bredero Shaw. Wah Seong is the largest pipe coater in Asia and the third largest in the world.

“There is also a high possibility for the clients to split such mega projects among a few players so as not to put all their eggs in one basket, so we all get a portion of the jobs,” Maccagno points out.

OSK Research O&G analyst Jason Yap concurs.

“We believe the probability of order book replenishment, especially for Wah Seong’s pipe-coating and corrosion protection business, which makes up some 40% of total revenue, is high given its market leadership.

“We are not too concerned about this. Our major concern is the possibility of delay in O&G jobs and cancellation of existing orders,” he opines.

Order book for the pipe-coating division now stands at RM800mil while the company is bidding for over RM4bil worth of jobs.

While Maccagno expects some global projects to be delayed, he foresees the Asia-Pacific to continue to be vibrant for the O&G pipe-coating business.

“More specifically, we are looking at the exciting Australian and Papua New Guinea markets which are estimated to be worth US$1bil. We also see Europe and West Africa driving our growth in the next three years,” he says.

Europe in particular will be of much interest to Wah Seong as the region is currently grappling with the issue of alternative sources of gas because of continuous supply disruption from Russia.

This will accelerate the development of potential pipeline projects presently on the drawing board, Maccagno notes.

On capex for the pipe-coating business, Maccagno does not anticipate significant investments over the next two years.

“We have positioned ourselves very well over the last two years in Malaysia by making significant investments in improvements and new facilities in Kuantan and Kota Kinabalu, and we are now starting to reap the benefits,” he adds.

Any investment will be focused on research and development for the group’s newly acquired specialised concrete-coating process technology in Europe, introduction of new products and solutions for deepwater coating and other new variants of anti-corrosion coatings.

Rising demand for gas compressor

Maccagno believes there is also potential for increased demand for rental of gas compressors – Wah Seong’s other fast-growing O&G business – during the current credit crunch and period of economic uncertainty.

In a credit crisis and uncertain times where oil prices fluctuate, the rental option is generally viewed to be an effective option by O&G companies to help them limit capex and risk exposure.

“We have had more enquiries regarding rental units recently. Our strategy remains to grow the rental side of the gas compressor business. And we believe that market conditions are uniquely aligned to allow us to do this.

“We continue to experience good demand for our products and services, and remain very positive on the long-term prospects for this business,” Maccagno says.

OSK’s Yap says Wah Seong’s gas compressor business, which consists of manufacturing and rental of gas compressors, provides the group with recurring income, a necessity in the current economic slowdown.

“Although Wah Seong’s core activity is pipe-coating, the gas compressor operation provides cash flow to the group and is a resilient business. Margins are also better, believed to be 40% to 50%. It can be big business for the group,” he adds.

Maccagno sees a push to enhance the production of the many ageing and mature O&G fields in South-East Asia, the Middle East and Australasia, going forward, to create opportunities and demand for gas compression.

There is also a growing global awareness and movement towards cleaner sources of energy – natural gas as fuel for power generation and even vehicles – which will also drive the demand for additional gas compression horsepower, he says.

With emphasis on that, Wah Seong is tendering for about 50,000 horse power of gas compressors for rental, with results expected in a few months. It is eyeing the North American market, the biggest in the world with some 70% of the global gas compression business.

OSK Research O&G analyst Jason Yap believes there is a good chance that Wah Seong will look for a partner in the gas compressor business.

“We understand that management has been trying to boost its rental business as it provides recurring income for a period of three to five years.

“We think management still looks at the business on a long-term basis and any acquisition now is likely to be a value buy,” he says.

For the nine months ended Sept 30, 2008, the group recorded a 30.2% jump in net profit to RM78.4mil versus the same period in 2007 while revenue grew 24.4% to RM1.76bil.

Related story:

M&As help transform firm into largest pipe coater in Asia


WASEONG : [Stock Watch] [News]

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