Oil companies with exposure to E&P seen most vulnerable

“Therefore, the low oil price environment is negative for the oil and gas players,” Kenanga Research said.

PETALING JAYA: Oil and gas (O&G) companies with exploration and production (E&P) exposure are expected to be the first casualties in a prolonged impact of falling oil prices.

MIDF Research, in a report, said the sharp plunge in oil price will definitely hit the upstream E&P players the most, given that the oil productions are directly correlated to the oil price.

“In a prolonged oil price war environment, globally, we anticipate oil majors to cut or delay some portion of their planned capital expenditures (capex) for 2020 which in turn, could potentially result in delayed contract awards for the O&G service providers.

“Therefore, the low oil price environment is negative for the oil and gas players.”

Kenanga Research concurred, believing that the companies to feel the impact first would be local E&P players, namely Sapura Energy Bhd and Hibiscus Petroleum Bhd.

The research house said low oil price environment could ignite a slowdown in global sanctioning of new projects, potentially impacting companies benefiting from greenfield projects, namely fabricators such as Sapura Energy and Malaysia Marine and Heavy Engineering Holdings Bhd.

It added that floating production storage and offloading players such as Yinson Holdings Bhd and Bumi Armada Bhd, as well as pipe players like Pantech Group Holdings Bhd and Wah Seong Corp Bhd, will also be affected.

“Meanwhile, all equipment and services contractors across the board are also expected to face even greater margin pressure, such as Dayang Enterprise Holdings Bhd, Uzma Bhd, Dialog Group Bhd, Serba Dinamik Holdings Bhd and Velesto Energy Bhd, among several others.

Petronas Chemicals Group Bhd may also be impacted, given how correlated petrochemical prices are to crude oil.”

MIDF Research noted that because 50% of Sapura Energy’s E&P arm had been sold to OMV AG, its exposure to the sharp drop in oil price is limited.

“However, it might further delay the recovery of its drilling segment which remains at a loss-making position.”

As for the local oil and gas support services players, in the event of a prolonged low oil price environment, MIDF Research said it is favourable towards companies that are involved in maintenance, construction and modification (MCM) services.

“This is due to the fact that Malaysia is an oil exporting nation and revenue from oil-related income constitutes 30.9% of the total Government revenue in 2019. To ensure stable revenue and cash flow, oil production must be sustained.

Hence, MCM services will be carried out regardless of the oil price environment.

“Therefore, we believe that national oil company Petroliam Nasional Bhd (Petronas) will remain committed to its maintenance spending in 2020.

Nevertheless, the low oil price environment could also mean compressed margins for the players.”

Meanwhile, UOB Kay Hian said there is a high likelihood of reduced capex spending by Petronas.

Petronas said yesterday it was reassessing its plans and budget but currently intends to maintain its domestic capex plans as well as the planned dividend of RM24bil to the government this year.

“Petronas guided that it budgeted on a US$50 per barrel oil price and expects local capex to increase year-on-year from RM25bil to RM26bil and RM28bil.”

The research house noted that the Covid-19 pandemic would be a triple whammy to Petronas in the form of oil prices (upstream income), petrochemical demand (downstream income) and disruptions/ force majeures on long-term LNG exports.

“Although now combined with the current failure of the Organisation of the Petroleum Exporting Countries (Opec), we think Petronas may be forced to take action and may reduce capex and slow down work orders.”

Crude oil prices rebounded on Tuesday and was at the range of US$38 per barrel at press time.

Oil prices slumped to US$30 per barrel from US$60 on Monday, the lowest ever recorded since the Gulf War in 1991, following Opec and Russia’s failure to agree on output cut to bolster prices.

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