O&G recovery on the horizon, but upstream rollouts still slow

Petroliam Nasional Bhd (Petronas) recorded a solid fourth quarter of 2016 (4Q16) core earnings which analysts believe could indicate that the oil and gas (O&G) sector in Malaysia is on track to recovery.

The research arm of AmInvestment Bank Bhd (AmInvestment Bank) pointed out that the Malaysian upstream capex trajectory still faces weak prospects as Petronas’ 2016 spending fell 22 per cent to RM50 billion.

This was underscored by a sharp 90 per cent year-on-year (y-o-y) plunge in new 4Q16 orders to only RM112 million, awarded to Malaysian operators compared with RM5.3billion in 3Q16.

“While there have been some recent awards to SapuraKencana Petroleum Bhd (SapuraKencana) since the beginning of the year, the rollouts still appear weaker year-on-year (y-o-y),” it said.

It also noted that global capex growth is expected to be driven by onshore drilling as according to Barclays’ latest global spending survey of over 200 companies, global O&G capex for 2017, earlier estimated to grow by five per cent, is now expected to rise higher by seven per cent driven by onshore spending.

Furthermore, the research team pointed out that global offshore spending is expected to fall 20 to 25 per cent.

“Contracted floating rigs are expected to fall to 120 from 133 currently.

“Over 59 per cent of Barclays’ respondents now view less than 25 per cent of cost reductions are structural, compared with 45 per cent of respondents surveyed in September 2015,” it explained.

Nevertheless, AmInvestment Bank highlighted that the downstream segment in Malaysia was “looking good”.

“Saudi Aramco’s US$7 billion investment for a 50 per cent stake in the refinery and cracker project in the Pengerang Integrated Complex (PIC) in Johor has reignited interest in the larger oil and gas hub called Refinery and Petrochemical Integrated Development (RAPID),” it highlighted, adding that it is projected to cost US$27 billion and has currently reached a completion stage of 60 per cent as planned.

“Dialog Group Bhd, strategically located at the entrance of the massive project, and Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) nearby fabrication yard in Pasir Gudang are expected to benefit from new job flows in the area.

“Other players hoping to secure some outsourced contract works may be Barakah Offshore Petroleum Bhd and Muhibbah Engineering Bhd.”

Meanwhile, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) separately outlined Petronas’s 4Q16 core earnings recovering strongly by 113 per cent quarter-on-quarter (q-o-q) and 79 per cent year-on-year (y-o-y), aided by lower product and production costs.

“In 2017, we believe Petronas’ operating cash flow at most will be sufficient to cover its committed capex of RM60 billion and not able to fully fund its dividend commitment of RM13 billion (compared with RM16 billion in the financial year 2016).

“However, this is not alarming, in our view, as Petronas’ balance sheet remains healthy with net cash position of RM53.9 billion as of 4Q16 even though it has deteriorated from RM66.8 billion in 4Q15,” it opined.

On the shrot pull-back in global oil prices, Kenanga Research believed that the pull-back would not affect Petronas’ spending given that the local oil major has pegged its capex spending at average US$45 per barrel (bbl), which is relatively conservative as compared to Energy Information Association (EIA) forecast of US$54 per bbl.

It added, while the positives from the production cut between OPEC and non-OPEC nations could have been priced in, it expected consistent compliance from the OPEC nation and higher compliance from Russia from current level till end of June.

“Additionally, we reckon that the market is building in expectations for an extension after the six-month period which will be decided in the next OPEC meeting in May.

“All in, we retain our in-house Brent oil forecast of US$55 per bbl in 2017,” Kenanga Research said.

Overall, the research team reiterated a ‘neutral’ call on the sector with positive bias in view of better contract flows from Petronas and other oil majors.

Similarly, AmInvestment Bank maintained a ‘neutral’ stance as persistent low asset utilisation levels could still lead to negative cash outflows in the first half of 2017 (1H17).

“For Malaysian operators, which operate wholly offshore, oil majors’ lower offshore capex expectations mean that those struggling with high gearing such as SapuraKencana Petroleum, Bumi Armada, Alam Maritim and UMW Oil & Gas will still face stiff headwinds.

“We prefer companies with stable and recurring earnings such as Dialog Group and Yinson,” it added.

Source: Borneo Post (via O&GLinks)
Event date: 
Saturday, April 8, 2017