SINGAPORE (Aug 25): OCBC Investment Research analyst Low Pei Han says banks that are currently financing the O&G companies will play a key role in ensuring their survivability.

“Local banks currently still seem keen to support the sector, and we would look out for companies with heavy reliance on foreign banks,” writes Low in a note on Thursday.

On Wednesday, Malaysia’s RHB bank reported a 37% fall in 2Q16 net profit to MYR 350 million which included a net impairment allowance of MYR 192 million on Swiber. Excluding this, 2Q16 core net profit would have dipped just 4% instead.

Low says owners or lenders who will sell for desperate consideration are still rare so far. And unless forced by lenders, owners are reluctant to sell, and lenders are loath to liquidate loans at fractions below par.

Under such circumstances, transactions are likely to involve equity consideration, or equity-like securities such as warrants or convertibles, or transfer of debt, rather than pure cash considerations.

“We have seen some investor interest in the bonds of companies vs. their equity, but we caution that a lot depends on banks’ willingness to support, and investors will likely need to hold the bonds till maturity, besides the risk of “amend and extend” prior to maturity,” says Low.

In addition, how much stress each O&G company faces depends on where it is along the value chain, adds Low.

Order flow has dwindled and is likely to remain so until oil prices show signs of a sustained recovery. The asset owners first need to see an uptick in demand first before they are willing to place orders with the fabricators.

“Confidence has to come back to oil and gas companies first, who will then award projects, benefiting companies lower down the value chain,” says Low.

Although OPEC members are meeting major exporting non-OPEC countries at the International Energy Forum in Algeria from 26-28 Sep to discuss the oil market situation, many market watchers expect a low possibility of curtailed output by OPEC.

Low is therefore sticking to her “neutral” view of the sector.