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MARC has affirmed its AA-ID(cg) rating on KMCOB Capital Berhad’s (KMCOB Capital) RM630.0 million Murabahah Medium Term Notes (MMTN) facility. At the same time, MARC has revised the outlook on the rating to negative from stable. KMCOB Capital is an indirect wholly-owned subsidiary of Scomi Oilfield Limited (SOL), the investment holding company of Scomi Group Berhad’s (Scomi) oilfield services business. KMCOB was established as a special purpose vehicle to issue the RM630.0 million MMTN as part of Scomi’s restructuring exercise in 2006. The “(cg)” suffix on the rating reflects the corporate guarantee by Scomi Oiltools Bermuda Limited (SOBL).
The rating outlook revision reflects Scomi’s oilfield services division’s exposure to the impact of uncertain oil and gas prices on the demand for oilfield services over the short- to-intermediate term. Low oil prices have prompted cutbacks in global oil exploration and development spending and MARC believes that profitability and cash flow generation of Scomi’s oilfield services business will remain under pressure if oil prices continue to be depressed. The affirmed debt rating, meanwhile, recognises the division’s above average business market position and good geographic diversity, partially offset by its exposure to continuing volatile oil and gas prices, its relatively high gearing level and the expectation of little debt reduction through 2009. The oilfield services business is currently core to Scomi’s debt servicing capacity as it represents 72.9% of total revenue and approximately 53.2% of the group’s pre-tax profits (excluding extraordinary gains) for financial year ended December 31, 2008 (FY2008). For FY2008, SOL’s pre-tax profit (unaudited) fell 54.4% to US$10.1 million, although revenue showed a marginal increase of 10.1%. The results reflect margin erosion as a result of higher operating costs. The resulting lower cash flows from operations (CFO) for FY2008 of US$6.2 million compared to US$37.8 million for FY2008 was on account of eroded profitability and increasing working capital requirements.
Given the continuing slowdown on global demand in the core markets of Scomi’s oilfield services, MARC expects the group’s operating performance to remain under pressure and possibly weaken should market conditions deteriorate further. Despite its large order book of US$431.7 million with an average run-up to FY2010, Scomi’s oilfield business is noticeably experiencing slow contract replenishments in FY2008. Scomi has acknowledged the need for immediate cost reduction and is in the midst of downsizing and realigning its global operations in order to preserve its cash flow.
Ratings stability will be conditioned on progress with respect to cost-containment initiatives as well as maintenance of adequate liquidity and capital resources for the rating level. Aside from weak global economic conditions, MARC believes that SOL could face another obstacle over the intermediate term should the recently announced US Department of State sanctions on Scomi’s CEO and major shareholder prove punitive to the competitive standing of the group’s oilfield services business in the US market. Pursuant to the legal opinion of an appointed US legal counsel in Washington D.C., Scomi has restructured its management reporting to ensure business and operational continuity within Scomi pending formal confirmation from the US Department of State that Scomi is not subject to the sanctions imposed on En. Shah Hakim. MARC will continue to monitor developments for rating implications as further clarity emerges in relation to the impact of the sanctions.
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