PETALING JAYA: Petroliam Nasional Bhd’s (Petronas) poor performance and sober prediction for the oil and gas industry next year spell a challenging outlook for the industry players with earnings at risk.
Analysts are underweight on the sector for 2016, with some pointing out that preservation of cashflow would be key as Petronas cuts down on its spending.
UOB KayHian Research, which has an “underweight” call on the sector, said Petronas would need to continuously readjust its capital priorities, which might further defer upstream activities.
Petronas released its third-quarter results on Wednesday, which analysts said was the national oil company’s worst quarterly performance, with a net profit of RM1.4bil after an RM5bil impairment, against RM11bil in the second quarter. Petronas had recorded RM15.1bil in profit after tax in the corresponding period last year.
For the nine months, net profit fell 41% year-on-year to RM30bil, due to the fall in crude oil prices. So far this year, revenue is down 25% to RM187.6bil compared to the RM249.8bil that it had chalked up in the similar period last year due to lower crude oil prices.
Maybank Investment Bank Research (Maybank IB) said the results were not surprising. It said cashflow preservation was paramount at such a time.
Almost all analysts concurred that although Petronas was committed to its capital expenditure (capex) programmes of RM350bil over the next five years, the poor results would affect the downstream players.
As a result, service players that highly depend on Petronas jobs such as Barakah Offshore Petroleum Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE), Perisai Petroleum Teknologi Bhd, Dayang Enterprise Holdings Bhd and UMW Oil & Gas Corp Bhd would be affected.
“More companies could face further book value deratings, like in the case of MMHE/Perisai which have underperformed by more than 30% year-to-date. Stocks under our coverage which could face earnings risks in 2016 are SapuraKencana Petroleum Bhd, Bumi Armada Bhd, Barakah, MMHE and Perisai,” said UOB in a note yesterday.
The national oil company would need to continue adjusting to the prolonged low oil price environment while it rode through the crude oil “supply shock” downturn, said Maybank IB.
Petronas has spent RM42bil in capex, largely on the Refinery and Petrochemical Integrated Development’s (Rapid) second phase as at the nine-month period and will pay RM26bil in dividends to the Government this year.
However, for 2016, it has committed to a lower dividend amounting to RM16bil, a figure that was arrived at after some negotiations.
“This move is sensible, as a fundamental recovery in the sector is not foreseeable in the next 12 months,” said Maybank IB.
Although Petronas is cautious on the outlook of the sector, it is not cutting its headcount at the moment, which Maybank IB views as “atypical” but “understandable” for a national oil company.
UOB said the company seemed to be on track to spend its RM70bil in capex for 2015 mainly on domestic projects like Pengerang and liquefied natural gas (LNG) Train 9 in Sarawak. Petronas remains committed to its three mega-projects, two floating LNG developments, Rapid and the Pacific North-West LNG project.
Developments in Iran, shale and Organisation of the Petroleum Exporting Countries would shape the outcome of the global oil market, said Maybank IB. It believes the magnitude of the fall in cost is still lower than the decline in oil prices, which means that there is a need to continue adopting disciplined cost-cutting and rationalisation measures.
For this, it has maintained its “neutral” call on the sector, with expectations for the oil price to trade between US$40 and US$60 per barrel over the next two years.
“Thematic-wise, we see little catalyst to re-rate. While risk still outweighs reward, we see pockets of excitement in the sector, from a valuation/newsflow standpoint,” it added.