Few jobs in O&G sector

Low demand: The likely scale-back in capital and operating expenditure by Petronas will point to low demand for services and assets offered in the O&G sector.

Cautious oil price outlook likely to result in capex, opex scale-back

PETALING JAYA: With the cautious outlook for oil price likely to signify continued scale-back in capital and operating expenditure by Petroliam Nasional Bhd (Petronas), this could point towards protracted low demand for services and assets offered by the oil and gas (O&G) sector, says TA Securities Research.

“Therefore during this downcycle, O&G contractors are expected to be in consolidation mode. This includes implementing measures such as conversion of short term debt to long term, fleet rationalisation, mergers and acquisitions, staff downsizing and others,” the research firm said in its report following Petronas’ lower nine-month financial year 2016 (9MFY16) core net profit of RM20.1bil which is down 14% year-on-year (yoy).

The research firm added that it was pessimistic the upcoming Organisation of Petroleum Exporting Countries (Opec) meeting on Nov 30 will yield substantial production cuts to counter the global oversupply. “Recall that Opec’s consensus in September to reduce output does not include key swing producers such as US, Russia, Canada, Libya and Iraq.

On top of that, the new US administration may likely follow through on its earlier stance to elevate the shale industry and maintain US’ energy independence,” TA said, maintaining its underweight stance on the sector since November 2014.

“At this juncture, we prefer to stay on the sidelines until headwinds dissipate. This would likely materialise following the oil price recovery, and subsequent exploration and production capex uptick,” the research firm said.

Petronas’ nine-month headline net profit, which came in 62% lower yoy at RM7.5bil included asset impairments totalling RM12.6bil that’s largely attributed to the upstream segment. There was also one-off costs amounting to RM1bil for the takeover of the Berantai risk-service contract.

The bulk of the capex of RM36bil in the nine-month period was allocated locally for Rapid, upstream projects and Sabah Ammonia Urea project.

TA pointed out that while controllable costs were lower by 9% yoy, the group had net cash outflow of RM9bil in 9MFY16 mainly due to chunky dividend payments. Nevertheless, its net gearing at 0.1 times and cash levels of RM115bil remained healthy.

Meanwhile UOB Kay Hian Research noted that from its third quarter FY2016 assessment, oil majors are increasing gearing levels given that operating cash flow continue to lag behind incurred capex.

“Locally, channel checks suggest that upstream activities may be lacklustre in 2017 as Petronas is focused on downstream development. Sector earnings visibility will remain poor with risks of contract renegotiations/terminations still inherent.

Some contract flows like rigs, floating production storage and offloading (FPSO) and transport and infrastructure (T&I) jobs are expected but are at best only to partially replenish the order books of selected companies. Overall, this necessitates being selective on stocks,” it said in its report yesterday.

The research firm said that the consensus 2017 Brent forecast of US$55 per barrel appears realistic, supported by a recent comment from Saudi Aramco which views US$50-US$60 per barrel range as sufficient to support low-cost resources over the next 3-4 years.

UOB Kay Hian, which maintains its “market weight” on the O&G sector said that Bumi Armada Bhd remains an undervalued FPSO proxy versus its direct local peer, Yinson Holdings Bhd.

“As long as Bumi Armada commits to executing four floating projects by end-16, we see low termination risks and anticipate doubling of profits and cash flow improvements by 2017.”

Kenanga Research envisages that with the new round of contract awards from Petronas such as Pan Malaysia T&I contracts and topside maintenance jobs likely to materialise in the near term, companies such as SapuraKencana Petroleum Bhd, Dayang Enterprise Holdings Bhd and Barakah Offshore Petroleum Bhd could emerge as potential beneficiaries.