Oilcorp Bhd - 2009 Credit Commentrary Report

MARC continues to place its ratings on Oilcorp Bhd’s (Oilcorp) RM70 million Murabahah Underwritten Notes Issuance Facility / Islamic Medium Term Notes Facility (MUNIF/IMTN) of MARC-2ID /A-ID ratings on MARCWatch Negative where they were first placed on May 22, 2008.  The continued MARCWatch placement highlights Oilcorp’s thin liquidity cushion relative to its significant upcoming debt maturity in October 2009.  Since MARC’s last rating update on February 20, 2009 Oilcorp has deposited its second sinking fund payment of RM6 million due July 7, 2009 which partially, but not completely mitigates our concerns regarding Oilcorp’s tight liquidity position. Oilcorp is principally an investment holding company with three main core businesses: oil and gas engineering; property investments; and deep-sea fishing.

MARC’s continued negative watch placement is prompted by the lack of improvement in Oilcorp’s liquidity position which could be tightened further on account of working capital requirements to fund its increased order book.  Oilcorp’s project-focused nature of its operations predisposes the group to lumpy trade receivables and cash receipts.  Oilcorp’s trade receivables and unbilled work-in-progress remained elevated at RM439.9 million at end-2008 (FY2007: RM413.9 million). Significant outstanding receivables include its RM52.5 million from a Middle East petroleum project, RM168.5 million from its Middle East construction project and RM130.3 million from two biodiesel plant contracts. Collectively, these major accounts make up 79% of the group’s trade receivables.  Oilcorp’s average receivables collection period (including unbilled work-in-progress) worsened to 449 days for the financial year ended December 31, 2008.  MARC is of the view that Oilcorp’s low level of back-up liquidity as represented by unrestricted cash and committed undrawn credit lines will cause heavy reliance on bank refinancing or operational cashflows to meet its near-term debt obligations.  MARC believes that Oilcorp’s ability to restore its liquidity position and to meet its short-term debt obligations will depend significantly on the collection of long outstanding trade receivables by the latter half of 2009.  

Oilcorp has bolstered its order book by securing two contracts worth approximately RM95 million in recent months. In addition, the group has recently received a letter of award for another major contract with an oilfield operator which will improve revenue visibility for its oil and gas and engineering division beyond 24 months. Core subsidiary, Oil-Line Engineering & Associates Sdn Bhd, is expected to resume work on its Middle East construction project after securing a term loan from Export-Import Bank of Malaysia.  The project had been stalled for most of FY2008 due to insufficient working capital.  Its consolidated net operating cash flow deficit widened to RM91.3 million in FY2008 compared to RM6.3 million the year before.   The group had recorded a 22.0% fall in total revenue to RM346.8 million in FY2008 while pre-tax profit almost halved to RM4.6 million from FY2007.