OIL and gas (O&G) experts are expressing mixed views on how the impending “marriage of the year” between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd, if they make it to the altar, will influence the local industry landscape.

OSK Research analyst Jason Yap thinks the merger between Kencana and SapuraCrest will definitely prompt other players to consider consolidation as well.

“But the consolidation trend may lean towards smaller companies joining the big boys rather than to consolidate among themselves,” he tells StarBizWeek.

The merger between Kencana (pic) and SapuraCrest is expected to prompt other players to consider consolidation as well.

Will the merged entity attract or approach smaller O&G companies to join them? Yap says that potentially the merged entity may be attracted to offshore support vessel (OSV) players like Petra Perdana Bhd and other companies that have high-horse power vessels in their fleet much required in the current O&G development.

In December last year, there was market talk that SapuraCrest was looking into an asset expansion with Petra Perdana as a likely target. News reports indicated SapuraCrest had hired investment bankers to look into a potential asset expansion exercise that included the possibility of acquiring O&G companies late last year.

But now, it can be a different story altogether as the merger, if it goes through, will first have to focus on management, operation and working culture integration between the two companies.

Consolidation or integration of companies to a bigger and stronger entity, according to an OSK Research report, is vital since the O&G industry is a highly capital-intensive business.

For instance, in the first development of marginal fields in Malaysia via the risk-service contract, both SapuraCrest and Kencana have to invest US$200mil (RM600.7mil) each.

“The benefits of a bigger merged entity include having better success rate when bidding for new contracts, better chances of being picked as a main contractor, which will command better margins for work done compared to a sub-contractor, increasing the ability to compete in the global market, and possessing more financial muscle to raise future funds, such as for marginal oilfield development,” says OSK Research.

A bigger merged entity will have better success rate when bidding for new contracts and being picked as a main contractor.

Meanwhile, an ECM Libra analyst says the merger proposal does not guarantee that the rest of the players in the industry are going to follow suit.

“This is because if the merger between Kencana and SapuraCrest goes through, the bulk of consolidation of the local O&G industry would have been completed. Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) had earlier inked an agreement with Sime Darby Engineering to acquire the latter's yard,” she says.

In May, MMHE entered into a memorandum of understanding with Sime Darby Engineering to acquire its 130-acre Pasir Gudang yard for RM399mil cash.

This is expected to radically transform Malaysia's fabrication landscape because if one includes Petronas' Teluk Ramunia yard, MMHE will have access to the country's largest domestic fabrication yard of 672 acres, which is 3.5 times Kencana Petroleum Bhd's current 192 acres, says AmResearch in a report in May.

“Nevertheless, the merger may be the trigger for smaller market cap companies, such as Petra Energy Bhd and Dayang Enterprise Holdings Bhd, to merge as they can do better by being bigger,” says the analyst.

AmResearch in one of its reports in April that was spot on over the mergers and acquisitions between MMHE and Sime Darby as well as Kencana and SapuraCrest also mentioned the likelihood of a merger betweenCoastal Contracts Bhd and Alam Maritim Resources Bhd.

A source close to the matter says the merger should trigger the consolidation trend in the industry.

“The big boys are pursuing it. And as a result of the big boys consolidating, smaller O&G companies may be affected due to fewer sub-contracts by the bigger players.

“Take for example like SapuraCrest. After the merger, it would not have to sub-contract the fabrication part anymore as its future partner Kencana has the capability to do so,” he says.