Declining profitability prevents downstream Asian oil companies

Declining profitability prevents many downstream Asian oil companies from growing into more than regional players, consultants Enerfinance said in a report.
"The last 2 years have weakened the financial situation of most local players, slowing down their expansion plans," Enerfinance said. That lack of financial stamina has reinforced the position of the oil majors and the Asian refining industry, "cannot hope to develop and grow without the commitment of Shell and Caltex ," the report by the Paris-based consultancy said. "Of local companies active in the Asia/Pacific, Petronas (Malaysia) stands alone as a highly profitable company," said Enerfinance, citing the company's 18 % return on profits. They said Asian theatre was favourable compared with Europe and the US since competition is weaker, refinery margins higher and growth more dynamic, but the decline in profitability has hit hard. "Today, it is clear that several oil companies would face severe difficulties if the competitive environment worsened suddenly or faster than expected," Enerfinance said.
The financial health of Asia/Pacific downstream players have hinged on various factors according to location - Japanese companies grew on high refinery margins and a protected market while in Korea strong demand growth was a key factor. "Especially worrying at present is the financial situation of Japanese players," Enerfinance said, adding that they lacked profitability, with asset returns down to 2-3 % in 1996 from a more usual 3-5 %, but they are also deeply in debt. Solidity ratios (measuring the percentage of assets covered by shareholder equity) are often in the teens or twenties than in the 35-45 % range more common internationally. Only low interest rates have stopped balance sheets turning red from interest expenses taking 50 to 70 % of operating profits, said Enerfinance.
Falling refinery margins, advancing deregulation and attendant restructuring costs and the likelihood of interest rate hikes indicated 1997 will be worse than 1996 with some companies expected to post losses. Some of the problems relating to Japanese operations were attributable to organisational difficulties. Affiliates of foreign groups have generally performed better than locals, the report said.
Korean oil companies, though under pressure, were in a better state than those in Japan. Return on assets are around 6-9 %, return on equity is about 6-11 % and solidity ratios range between 28-34 %. The biggest problem was high debt levels.
Enerfinance's analysis of Singaporean refinery SPC (international majors do not publish results in their Singapore operations) showed return on equity dropped to 1.5 % in 1995 with interest expenses absorbing 50 % of operating profit. Return on assets was down to 1.4 % in 1995 from 9 % in 1993.