Economies of scale key to merger of fabrication players

An analyst says a consolidation of oil&gas fabricators could happen sooner or later, caused by fewer jobs in the market, higher operating cost and intense competition.

A MERGER of oil and gas offshore fabrication companies is likely to be driven by economies of scale, with their huge combined capacity increasing the success rate in bids for big contracts, analysts said.TA Securities head of research Kaladher Govindan did not discount the possibility of existing oil and gas players which do not have a major fabrication business eyeing acquisitions of fabricators which have a poor performance record.

In the case of Sime Darby Engineering (SDE) Sdn Bhd buying over Ramunia Fabricators Sdn Bhd from Ramunia Holdings Bhd, he believes it will be a win-win solution for both parties.This is especially since Ramunia Fabricators' yard capacity in Johor is under utilised and it lacks expertise in managing projects efficiently, resulting in delays, while SDE is short on capacity.

"The value of fabrication jobs over the next five years is expected to exceed RM10 billion and a big portion of it entails the lucrative topside fabrication jobs. With the deep water in Teluk Ramunia, SDE will be able to build complex big structures," Kaladher told Business Times.

Ramunia's yard is strategically located to cater for shallow and deep-water projects in Peninsular Malaysia and Sabah and Sarawak.An analyst with a reputable research house, who declined to be named, said that a consolidation of oil and gas fabricators could happen sooner or later, caused by fewer jobs in the market, higher operating cost and intense competition.

While the government-linked companies (GLCs) in oil and gas offshore fabrication may benefit from a consolidation, it will be painful for the smaller fabricators such as Kencana HL Sdn Bhd, OilFab Sdn Bhd and Boustead Penang Shipyard Sdn Bhd, which are already hurt by smaller margins."As a bigger entity, the GLCs will be one up in winning major contracts awarded by Petroliam Nasional Bhd, leaving the smaller jobs for non-GLCs," he said.