AmInvestment Research remains cautious on oil and gas sector

Affin Hwang Research said across the value chain, production players will be the first to benefit from higher oil prices due to their oil-producing fields.

KUALA LUMPUR: AmInvestment Research remains cautious on the oil and gas sector given the unabated increase in shale oil production highlighted by rising US rig counts, which has surged 2.4 times since the all-time low in May 2016 to 950. 

It pointed out on Wednesday the capacity for fleet expansion is still significant as this US rig count accounts for less than half of the 30-year high of 2,031 back in 2008.  

“Persistent low asset utilisation levels as we do not expect any significant change in Petronas’ cautious approach to upstream exploration and development expenditures. 

“For 2Q2017, to date, contract awards have risen by 15% to RM2.2bil largely due to the lumpy award of the RM1bil Bokor central processing platform project to MMHE,” it said.

AmInvestment Research said for Malaysian operators, which operate wholly offshore, weak capex rollout prospects forebode that the worst can stretch for quite a while for those struggling with high gearing such as Bumi Armada and UMW Oil & Gas. 

Locally based companies such as Perisai Petroleum Teknologi, Alam Maritim and Nam Cheong Group are currently in financial distress. 

“Maintain Neutral stance as the prospects of the sector over the next 12 months are muted given that the direction for crude oil price appears to be ‘lower for longer”. 

“Our top picks are companies with stable and recurring earnings such as Dialog Group and Yinson. 

“Dialog’s earnings visibility is secured largely by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson’s Ghana floating production, storage and offloading vessel project will provide the earnings momentum over the next two years. 

“Our Hold calls are for Sapura Energy, MISC, Bumi Armada and UMW Oil & Gas while Petronas Gas is a Sell due to the upcoming implementation of the incentive-based regulatory tariff setting mechanism,” it said.

AmInvestment Research pointed out that supply-demand imbalance persists. It does not expect any immediate rebound in crude oil prices given the persistent supply-demand imbalance. 

Even with Saudi Arabia and Russia maintaining their production levels at the lower quotas agreed since the beginning of the year, for the next nine months until March 2018, US commercial crude inventories still stubbornly rose by three million barrels week-on-week and 11 million barrels on-year to 513 million barrels on June 2, 2017. 

Recall that Opec and non-Opec oil producing countries have agreed to extend their 1.8mil barrel/day cut from June this year. 

“This increasingly demonstrates that the geographical price catalyst for the sector has shifted from the Middle East export markets to the North American continent.  

“As Brent crude oil spot has averaged at US$53 a barrel since the beginning of this year, we maintain our 2017-2018 projection at US$50-US$55 a barrel. 

“As a comparison, Petronas is projecting an average of US$45 a barrel for 2017 while the EIA forecasts US$52.60 a barrel for 2017 and US$57 a barrel for 2018,” it said.